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By XE Market Analysis October 20, 2020 3:47 am
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    XE Market Analysis: Europe - Oct 20, 2020

    The Australian dollar continued to weaken, this time with RBA Assistant Governor Kent saying that the board is considering another easing, which backed up the Governor Lowe's recent messaging, that a rate cut and other monetary easing measures are in the works. AUD-USD, which has dropped every day since last Monday, fell by nearly 0.5% in posting a three-week low at 0.7031. The November ASX 30-day interbank cash rate futures is indicating about a 75% expectation for the RBA to cut the official cash rate by 25 bp to 0.00% at the board meeting on November 3. The New Zealand dollar also came under pressure, falling into 12-day low territory against the U.S. dollar. USD-JPY lifted to a one-week high at 105.61 in a second consecutive day of ascent, albeit in the context of narrow ranges. EUR-JPY also remained buoyant, though remained below its Monday high, while AUD-JPY dove to a three-week low at 74.20. Overall, a mixed performance for the yen. As for the dollar, also a mixed picture, rising against the antipodean dollar-bloc currencies and yen, but flatlining against the euro and sterling, among other currencies. USD-CAD edged out a high at 1.3202, surpassing Monday's peak by 6 pips. Sentiment in global markets is fragile. Wall Street yesterday and most stock markets in Asia today dropped, though U.S. equity futures have managed a partial recovery of Monday's losses. The looming U.S. elections, now just two weeks away, seems to be encouraging defensive positioning given the perceived risk of it be contested, which in such a scenario could lead to a messy political scene for a time and delay fiscal stimulus further (assuming this won't happen this side of the election). The ongoing surge in new Covid cases in the more northern parts of North America and, more especially, in Europe is alarming given the concomitant implementation of ever more draconian measures (Wales is about to enter a two-week 'total' lockdown and France is under night time curfew, for instance). Brexit also remains sharply in focus. The consensus, as evidenced by the stability of the pound, is that the EU and UK will reach a limited trade deal in time to be ratified on both sides of the Channel by year end.

    [EUR, USD]
    EUR-USD has settled lower after posting a one-week high at 1.1795 yesterday. The euro has more generally settled lower after rising against most currencies yesterday. A prevailing view that the EU and UK, despite the headline dramatics from political leaders, are heading for a free trade deal, albeit a limited one, have helped give both the pound and euro an underpinning over the last day, though wobbly global stock markets have helped put a cap on EUR-USD an EUR-JPY given the associated safe haven bid for the dollar and yen. We are leery about the euro's prospects at this juncture given the surge in new Covid cases in Europe, which has accelerated in some countries and is leading to increasingly draconian restrictions, and which will have consequences on economic activity and maintain the pressure on the ECB for more expansive monetary accommodation. And while we are at the same time would-be dollar bears, the proclivity for capital being safe harboured in U.S. Treasuries means this is hinged on the global growth outlook establishing a sustainable improving trend, and that in turn may hinge on the world getting through the Covid crisis. The upcoming U.S. elections present risks too, particularly given the perceived chance of the election being contested. Markets are anticipating another U.S. fiscal package, although legislation is unlikely to be passed this side of the elections, and the size and scope of it will be dependent on the election result. Wall Street narratives suggest that U.S. stock markets are pricing in a blue wave on November 3, with Democrats sweeping the House, Senate and Presidency, which would result in many trillions of dollars in fiscal support. On balance, we remain bearish on EUR-USD at this juncture.

    [USD, JPY]
    USD-JPY lifted to a one-week high at 105.61 in a second consecutive day of ascent, albeit in the context of narrow ranges. EUR-JPY has also remained buoyant, though remaining below its Monday high, while AUD-JPY, in contrast, has fallen to a three-week low at 74.20 on the back of a generally weak Australian dollar (which is down for a seventh straight day as markets discount further RBA easing). Overall, a mixed performance for the yen. Wall Street and most stock markets in Asia dropped, though U.S. equity futures have managed a partial recovery of yesterday's losses. The looming U.S. elections, now just two weeks away, seems to be encouraging a degree of defensive positioning and hedging given the risk of it be contested, which could lead to a messy political scene for a time and delay fiscal stimulus further (which looks unlikely to happen this side of the election). The ongoing surge in new Covid cases in the more northern parts of North America and, more especially, in Europe is alarming given the concomitant implementation of ever more draconian measures (Wales is about to enter a two-week 'total' lockdown and France is under night time curfew, for instance). The biggest directional force on the Japanese currency will, however, remain shifting risk premia in global markets. Japan's 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, has given the yen a profile a low-beta haven currency.

    [GBP, USD]
    The pound is softer today against most currencies after registering the biggest gain on the day yesterday. Cable has dropped back into the lower 1.2900s after yesterday pegging a high at 1.3025. The BoE-calculated effective real sterling exchange rate is down by nearly 4% on the year-to-date, although up by just over 6% from the March-23 low, and is down by almost 11% from levels that were prevailing just ahead of the vote to leave the EU in late June 2016. Talks between the EU and UK are continuing, despite Boris Johnson's political grandstanding on Friday when he said that discussions were over, although having been downgraded by the Downing Street to video conferences (a EU delegation had been set to arrive in London this week). The consensus expectation remains for a limited deal to be produced by mid November and ratified on both sides of the Channel in time for the conclusion of the transition period at year end. A BBC journalist reported that the EU's Barnier is "frustrated" with leaders of coastal EU nations for not yet allowing him to proceed on tackling inevitable compromises on fishing rights. But pundits and market participants appear to be confident a deal will be reached, being, from the perspective of the so-called coastal EU nations, a simple choice between no fishing rights in UK waters under a no deal scenario versus reduced quotas under an agreement. Note that currently more than half of the UK's annual fishing quota is foreign owned. Regarding Johnson's Internal Market Bill, the expectation is that he will concede by removing the offending passages in it -- i.e. the parts that would enable the UK government to unilaterally overwrite parts of the Withdrawal Agreement -- which was likely his plan all along. We remain bearish on the pound over the medium term. Swapping unfettered access to the EU's single market and customs union in place of a narrow free trade deal with increase trading friction and costs. Note that Wales has announced it will be going into a 17-day full lockdown, and that Moody's downgraded UK sovereign debt to Aa3 from Aa2.

    [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 edged out a high at 1.3202, surpassing Monday's peak by 6 pips. The Canadian dollar tracked oil prices, which have pulled back from the 11-day highs that were seen yesterday. 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 perceived 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 be receding somewhat. 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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