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By XE Market Analysis October 9, 2020 3:03 am
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    XE Market Analysis: Europe - Oct 09, 2020

    The dollar is down for a third consecutive day, as measured by the narrow trade-weighted DXY USD index, which pegged a three-day low at 93.43. EUR-USD has remained buoyant, though has so far held below the 1.1781-82 highs seen over the last couple of days. Cable has seen a similar price action, while AUD-USD posted a three-day high at 0.7188 and USD-CAD a 17-day low at 1.3178. A near 11% rise in oil prices over the last week has been supportive of the Canadian dollar, and other oil-correlating currencies. USD-JPY ebbed moderately on the influence of broad dollar softness, with the yen trading steady-to-softer against other currencies. AUD-JPY edged out a three-day high, and is near three-week high territory, while CAD-JPY hit a 24-day peak. Risk appetite in global markets has been boosted by news of fresh talks on Capitol Hill about a fiscal relief package, and by polls showing an increase in Biden's lead over Trump, and an increased possibility of there being a Democrat sweep at the November 3 elections. The Democrats are much more hawkish on fiscal stimulus than the Republicans, while their growing lead in polls is also seen as reducing the risk of the election being contested. In the mix was the return of Chinese markets after a one-week hiatus, and some encouraging data out of the world's number 2 economy. While Japan's Nikkei dipped after printing a near eight-month peak, other markets in Asia and U.S. index futures rallied. This was accompanied by a weakening in the dollar and yen against most other currencies, fitting the usual correlative pattern, with the underperformance in the former weighing on USD-JPY. Chinese stock markets rallied in a catch-up dynamic after missing a bullish week in global markets. The bellwether CSI 300 index was showing a 2.1% gain as of the mid afternoon in Shanghai. Data showed air passenger volumes were 91% of the volume seen during last year's Golden Week holiday, illustrating a good degree of returned normality. China's Caixin September composite PMI came in at 54.5, down from 55.1 in August, but showing ongoing robust expansion with the rate of job creation reaching a 10-month high.

    [EUR, USD]
    EUR-USD has remained buoyant, though has so far held below the 1.1781-82 highs seen over the last couple of days. More dovish remarks have been coming from ECB policymakers this week, who have recently let it be known their concern about the recent rise in the euro's effective exchange rate, given its tightening impact on real interest rates at a time when new Covid restrictions are crimping economic activity. ECB's Schnabel also warned yesterday about credit cycle risks further down the track, especially when support measures are withdrawal, which could equally be applied to the UK, the U.S. and many other economies given the large debt levels that have been built up over the last decade. Overall, there are no strong directional bias at play in EUR-USD at the current juncture, though we anticipate the prevailing bias is to the upside, assuming risk appetite holds up on global markets. New positive Covid tests outcomes continue to shoot up in Europe, but the rate of serious illness (as measured by ICU admissions) and mortality rates remain at low levels, although bumping up in many countries, as indeed are the same metrics for other respiratory disease in the usual seasonal pattern. Tentatively, there is little sign as yet that another big wave impact on public health, as witnessed in March and April in Europe, is happening. But most governments are nervous and firmly set on pursing virus-suppression-until-vaccine strategies. Northern states in the U.S., as in Canada, are also seeking spikes in positive Covid tests, which is also leading to the implementation of new restrictions.

    [USD, JPY]
    USD-JPY ebbed moderately lower on the influence of broad dollar softness, with the yen trading steady-to-softer against other currencies. AUD-JPY edged out a three-day high, and is near three-week high territory. Risk appetite in global markets has been boosted by news of new talks on Capitol Hill in the U.S. on a new fiscal relief package, and by polls showing an increase in Biden's lead over Trump, and an increased possibility of there being a Democrat sweep at the November 3 elections. The Democrats are, obviously, much more hawkish on fiscal stimulus than the Republicans, while the growing lead in polls is also seen as reducing the risk of the election being contested. In the mix was the return of Chinese markets after a one-week hiatus, and some encouraging data out of the world's number 2 economy. While Japan's Nikkei dipped after printing a near eight-month peak, other markets in Asia and U.S. index futures rallied. This in turn led to a weakening in the dollar and yen against most other currencies, with the underperformance in the former weighing on USD-JPY. Chinese stock markets rallied in a catch-up dynamic after missing a bullish week in global markets. China's bellwether CSI 300 index was showing a 2.1% gain as of the mid afternoon in Shanghai. Data showed air passenger volumes were 91% of the volume seen during last year's Golden Week holiday, illustrating a good degree of returned normality. China's Caixin September composite PMI came in at 54.5, down from 55.1 in August, but showing ongoing robust expansion with the rate of job creation reaching a 10-month high. In Japan, household spending contracted 6.9% y/y, slightly worse than expected but to little market impact. The data underscores weak consumer demand, which will be drag on GDP. The yen can be expected to weaken against most peers during phases of sustained positive risk appetite up in global markets, which in Japan leads to net outflows in both speculative and non-speculative capital.

    [GBP, USD]
    Sterling continues to lack directional bias. BoE Governor Bailey said yesterday that the central bank will use monetary policy "actively and aggressively" if needed, referencing the economic threat posed by Covid and associated restrictions, though he is singing from the same hymn similar as policymakers at other central banks, and so didn't draw much response in the forex market. Attention remains fixated on the final phase of talks between the EU and UK, with less than one week to go until the EU's summit. UK chief negotiator Frost said that the government is willing to compromise on the contentious issue of state aid rules to win an "eminently achievable" trade deal. A Bloomberg article yesterday cited EU sources saying that a deal is likely, despite the tensions. This should strengthen the consensus view amongst onlookers is for a limited tariff free, quota free deal, which we concur with. The impact of a no-deal departure from the EU would have, and in particular the impact it would have on the UK's financial services industry -- the golden goose of the UK tax revenue office -- gives Brussels a powerful negotiating hand. Fishing rights and level playing field rules, of which state aid rules, have been the principal obstacles. France is the main objector to UK demands on fishing, but is under pressure from other EU nations to make concessions. A recent BBC article reported that EU diplomats are hoping that "guiding principles" in place of strict adherence to level playing field rules, alongside a measures to resolve future disputes, may be the route to compromise on that front. It should be considered that Boris is under a lot of pressure from hardline Brexit ideologues in his party, whose influence is strong, having been the driving force behind the controversial Internal Market Bill. This suggests that a no-deal exit from the single market cannot be entirely ruled out. Even with a deal, and with the UK's signing continuity agreements with non-EU trading partners, both the UK and EU will see their terms of trade position deteriorate, especially on the British side of the Channel. For this, we are medium- to-longer term bearish on the pound.

    [USD, CHF]
    EUR-CHF has ebbed back under 1.0800 again, reflecting the chronic proclivity for the Swiss currency to rise in nominal terms, from incoming interest and other investment receipts from assets held abroad, alongside the trade surplus. A higher franc drives down inflation, which to a degree offsets any loss in export competitiveness that a nominally firmer currency might otherwise entail, as there is a high import component in Swiss exports. The SNB, however, remains committed to limiting gains in the franc. At its quarterly monetary policy review last month, it stated that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market". The cross has repeatedly failed to sustain gains above 1.0800 over the last couple of months, even though influence of the SNB's intervening hand may have been at play during the recent upside bursts. Total Swiss sight deposits of francs have risen sharply since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. EUR-CHF remains below the seven-month peak that was seen in early June at 1.0921.

    [USD, CAD]
    USD-CAD has posted a 17-day low at 1.3172 while CAD-JPY has hit a 24-day peak. An near 11% rally in oil prices over the last week has been underpinning the Canadian dollar, and other oil-correlating currencies. This comes with risk appetite in global markets holding up, despite the surge in new Covid cases in Europe and Canada, and northern states in the U.S. Positive news about vaccines and treatments have been factors helping lift investor spirits this week, while markets are looking past near-term disappointments in negotiations for new fiscal stimulus in the U.S. on the expectation that it will come in the not too distant future. Polls showing an increase in Biden's lead over Trump, and an increased possibility of there being a Democrat sweep at the November 3 elections, also imply increased odds for large stimulus, along with reducing the risk of the election being contested. On Canada's domestic front, rising positive Covid tests are becoming a problem as they are leading to economically disruptive restrictions, although given the oil factor this is unlikely to undermine the Canadian dollar. Canada's September employment report is up on today, where we anticipate a 100.0k headline gain after the 245.8k rise in August, with unemployment seen ebbing to 10.0% from 10.2%.

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