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By XE Market Analysis October 15, 2020 4:11 am
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    XE Market Analysis: Europe - Oct 15, 2020

    A decline in the Australian dollar interrupted any otherwise directionally limited phase in currency markets. RBA Governor Lowe, in a speech, signalled that a cut in the cash rate to 0.1% and an easing in the 3-year yield target, along with a rise in longer dated government bonds, are on the cards. This cemented market expectations for the RBA to move at its November 3rd meeting. AUD-USD fell 0.7% in posting an eight-day low at 0.7010, and the Aussie saw a similar magnitude of decline against the euro and the pound, and a 0.5% loss in the case versus the yen. The Australian dollar is down by nearly 2% versus the U.S. dollar from the high seen last week. News this week that China is halting the import of Australian coal, alongside the weakening in the yuan this week (after China lower reserve requirements on yuan forwards), imparted a downward trajectory on the currency before Lowe made his contribution today. Elsewhere, EUR-USD has been plying a narrow range around 1.1750, holding above yesterday's 10-day low at 1.1719. USD-JPY has recouped over half of the decline seen yesterday, which left a 13-day low at 105.04, in rising above 105.30. Chinese JGB purchases were reportedly a factor that underpinned the yen yesterday, while Japanese importers were reportedly selling yen today (today being a "gotobi" data, a multiple of five, on which accounts are traditionally settled in Japan). The pound has settled after rising quite strongly yesterday amid signs of progress in the EU and UK's future relations negotiation. The EU' summit today and tomorrow is now at centre stage. UK PM Johnson said after a call with EC head von de Leyer, according to a Downing Street spokesperson, that he was "disappointed" that more progress hadn't been made while noting "the desirability of a deal." It's clear that the summit does not mark a hard stop and that talks will continue. Pundits are reckoning that early November will be the absolute latest date to agree on a deal in time for the UK's year-end exit from the single market and customs union. Analysts at Goldman, JPMorgan and others are expecting a limited free trade agreement, which we concur with.

    [EUR, USD]
    EUR-USD has been plying a narrow range around 1.1750, holding above yesterday's 10-day low at 1.1719. The prevailing bias as been to the downside for the euro in recent days, against the dollar and many other currencies. Brexit risks are a consideration for the euro (although more acute for the pound) with both the UK and Eurozone set to see a deterioration in their terms of trade, even in the event the EU and UK made a new trade deal. A recent salvo of dovish signalling from ECB policymakers has also been in the mix, contributing in offsetting dollar weakness recently. Aside from the Fed itself, and partly in response to, many other central banks have been conducting similar messaging campaigns. The dollar, meanwhile, has been lifted by safe haven demand recently. While we remain dollar bearish in the big picture, the proclivity for capital to harbour in the safety of U.S. Treasuries means this is hinged on the global growth outlook establishing a sustainable improving trend, and that in turn is hinged on the world getting through the Covid crisis. The world perhaps may also want to get on the other side of the upcoming U.S. elections, given the concerns of the election being contested and the prevailing political balance failing to produce a much-needed fiscal package. Much needed given the incipient signs of the U.S. economy sinking into a liquidity trap (hoarding of cash is rendering monetary stimulus increasing impotent). The Covid new case situation, and the response to it, is worsening, especially in Europe. The next few weeks should be telling in terms of judging the actual public health impact -- as measured by ICU admissions and mortalities -- from the recent and ongoing billowing in positive Covid test results as compared to the impact seen back in March/April. The ratio of the Covid impact relative to the impact of other contagious respiratory disease should also be considered. On balance, we are bearish on EUR-USD at this juncture.

    [USD, JPY]
    USD-JPY has recouped over half of the decline seen yesterday, which left a 13-day low at 105.04, in rising above 105.30. Chinese JGB purchases were reportedly a factor that underpinned the yen yesterday, while Japanese importers were reportedly selling yen today (today being a "gotobi" data, a multiple of five, on which accounts are traditionally settled in Japan). Japanese data this week included a record 7.4% y/y rise in money supply as measured by M3, which is the broadest money aggregate. Not exactly a market mover, but given negative core inflation in Japan, is illustrative of the chronic liquidity funk the Japanese is in. At the same time, Japan's negative inflation print has a tightening impact on real interest rates. This contrasts to the loosening trend in the U.S. real interest rate, and the differential between the two is a structural negative for the nominal USD-JPY exchange rate (although modest). The biggest directional force on the Japanese currency will, however, remain shifting risk premia in global markets. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the yen has a long-established profile of a low-beta haven currency.

    [GBP, USD]
    The pound has settled after rising quite strongly yesterday amid signs of progress in the EU and UK's future relations negotiation. The EU' summit today and tomorrow is now at centre stage. UK PM Johnson said after a call with EC head von de Leyer, according to a Downing Street spokesperson, that he was "disappointed" that more progress hadn't been made while noting "the desirability of a deal." It's clear that the summit does not mark a hard stop and that talks will continue. Pundits are reckoning that early November will be the absolute latest date to agree on a deal in time for the UK's year-end exit from the single market and customs union. Analysts at Goldman, JPMorgan and others are expecting a limited free trade agreement, which we concur with. The speculative portion of the currency market is in reactionary mode, waiting on and responding to news developments as the Brexit endgame drama plays out. The stakes are enormous, especially for the UK, both economically and politically, and the consideration of this is why we anticipate a deal, albeit a limited one. Reaching a deal would mean Johnson disappointing the powerful ERG faction of his party, and Spain, France and UK making concessions on fishing (which seems likely given it's a choice between win-win and lose-lose). Any news of a deal would likely boost sterling over the near term, but even with a deal, and even with the UK's progress in signing continuity agreements with non-EU trading partners, the UK will see its terms of trade position deteriorate.

    [USD, CHF]
    The Swiss franc has been continuing to trend with a firming bias, consistently rebounding from bouts of weakness in recent months. This has seen EUR-CHF repeatedly ebb back from brief forays above 1.0800, and the cross has fallen to the lower 1.0700s in the latest phase as markets anticipate revamped monetary easing measures from the ECB. The franc has a proclivity to ascend on the influence of incoming interest and other domestically owned investment receipts from assets held abroad, alongside net inflows generated by Switzerland's trade surplus. A higher franc has been imparting deflation, 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 the production of Swiss exports (perpetuating the nominal trend by limiting the decline in the real effective exchange rate). The SNB, nonetheless, explicitly targets the exchange rate as one of the means to achieve its policy goals. At its quarterly monetary policy review last month, the central bank stated that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market".

    [USD, CAD]
    USD-CAD is up for a third consecutive day, this time printing a six-day high at 1.3164, building on the so-far moderate rebound from Tuesday's one-month low at 1.3097. The pair has scope to run higher given the risk-wary backdrop in global markets, which may both support the U.S. dollar and weigh on oil prices. On Canada's domestic front, rising positive Covid tests are becoming a problem as they are leading to economically disruptive restrictions, similar to Europe and parts of the U.S.

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