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By XE Market Analysis October 19, 2020 4:15 am
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    XE Market Analysis: Europe - Oct 19, 2020

    The dollar has traded softer, overall, losing ground the pound and Aussie and Kiwi dollars, though gaining slightly on the euro, which has opened the week with a modest weakening bias as surging new Covid cases push many European countries to more draconian restrictions. Asian stock markets and U.S. index futures rallied after Pfizer said it could have a vaccine ready by year-end, and with House Speaker Pelosi saying on Sunday that she was confident that a comprehensive U.S. aid package could be legislated for by the November-3 elections. EUR-USD dipped to the lower 1.1700s. USD-JPY edged out a four-day high at 105.50, reflecting moderate yen weakness. The New Zealand dollar posted a four-day high against the U.S. dollar at 0.6630 after the weekend election returned the incumbent Arden government, with its fiscally expansive bias, with a bigger majority. The Australian dollar found a footing after underperforming markedly last week (as a consequence of yuan weakening, trade tensions with China, and risk-off positioning). AUD-USD saw a four-day peak at 0.7109. The pound is moderately firmer, with Cable lifting to the mid 1.2900s and EUR-GBP ebbing back under 0.9050. Both the pair and the cross have so far remained within their respective Friday ranges. The market saw through Boris Johnson's high jinks on Friday, when he stated that talks with the EU were over. Talks will be continuing this week, with the EU's Barnier and the UK's Frost due to hold a video conference later today. The consensus expectation remains for a limited deal to be produced by mid November. On fishing, a principal sticking point, a simple win-win versus lose-lose choice should mean a compromise is found. Regarding Johnson's Internal Market Bill, the expectation is that he will concede by removing the offending passages in it (i.e. remove the parts that would enable the UK government to unilaterally overwrite parts of the Withdrawal Agreement), which was likely his plan all along. The expected narrow trade deal will likely the beginning of a evolving process in EU-UK relations. The UK will likely remain closely aligned with EU rules for another year, but may then seek to diverge from them as the UK economy reorientates.

    [EUR, USD]
    EUR-USD dipped to the lower 1.1700s despite the dollar softening against most other currencies. The euro has opened the week with a modest weakening bias as surging new Covid cases push many European countries to more draconian restrictions, which will have consequences on economic activity and maintain the pressure on the ECB for more expansive monetary accommodation. Brexit is a pressing issue. The market saw through Boris Johnson's high jinks on Friday, when he stated that talks with the EU were over. Talks will be continuing this week, with the EU's Barnier and the UK's Frost due to hold a video conference later today. The consensus expectation remains for a limited free trade deal to be produced by mid November, which will mark an erosion in the terms of trade positions of both the UK and EU, more acutely in the case of the former. In the U.S., Pfizer said it could have a vaccine ready by year-end, while House Speaker Pelosi saying on Sunday that she was confident that a comprehensive U.S. aid package could be legislated for by the November-3 elections. We are would-be dollar bears, but given the proclivity for capital being safe harboured in U.S. Treasuries, 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. On balance, we remain bearish on EUR-USD at this juncture.

    [USD, JPY]
    USD-JPY edged out a four-day high at 105.50, reflecting moderate yen weakness, which was driven by a pick up in risk appetite in global markets on hopes Covid vaccine and U.S. fiscal stimulus. 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 is moderately firmer, with Cable lifting to the mid 1.2900s and EUR-GBP ebbing back under 0.9050. Both the pair and the cross have so far remained within their respective Friday ranges. The market saw through Boris Johnson's high jinks on Friday, when he stated that talks with the EU were over. Talks will be continuing this week, with the EU's Barnier and the UK's Frost due to hold a video conference later today. The consensus expectation remains for a limited deal to be produced by mid November. On fishing, a principal sticking point, a simple win-win versus lose-lose choice should mean a compromise is found. Regarding Johnson's Internal Market Bill, the expectation is that he will concede by removing the offending passages in it (i.e. remove the parts that would enable the UK government to unilaterally overwrite parts of the Withdrawal Agreement), which was likely his plan all along. The expected narrow trade deal will likely the beginning of a evolving process in EU-UK relations. The UK will likely remain closely aligned with EU rules for another year, but may then seek to diverge from them as the UK economy reorientates. We are bearish on the pound over the medium term. Assuming that a no-deal scenario is indeed avoided and that the EU and UK strike a narrowly focused free trade deal, this will still leave the UK's terms of trade in a worsened position, which will have consequences on investment, productivity and economic growth, at least for the foreseeable future.

    [USD, CHF]
    The Swiss franc has been continuing to trade 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. This along with Brexit risk, which has been weighing on the euro. 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 posted a four-day low at 1.3168, extending the retreat from the eleven-day high seen last Thursday at 1.3261. The improvement is risk appetite has both seen the U.S. dollar soften and the Canadian dollar, correlating with oil prices, firm. Front-month WTI crude futures posted a 10-day high at $41.44 today. Sharply rising new Covid tests remain a worry to the global outlook given the increasingly stringent countermeasures being implemented in Europe, but also areas in North America. The risk of the upcoming U.S. election being contested is also a concern, although the polling trend in favour of Biden suggests this perceived peril may at least be receding. We retain a bearish view of USD-CAD in the bigger picture, though this hinges on getting through the Covid crisis.

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