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By XE Market Analysis October 29, 2020 4:59 am
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    XE Market Analysis: Europe - Oct 29, 2020

    The dollar and yen have softened after rallying strongly yesterday on safe haven demand. Short-term speculative participants and others accumulated large long exposures in these currencies, particularly in yen crosses such as CAD-JPY, and there has naturally been some impetus to book profits with U.S. and European equity index futures finding a footing after yesterday's rout. The DXY dollar index ebbed back to a 93.34 low after peaking yesterday at 93.58, but remains up by nearly 1% from last week's low. EUR-USD settled around the 1.1750 mark, up on yesterday's 1.1717 low. USD-JPY steadied in the lower-to--mid 104.00s, above yesterday's five-week low at 104.11. As expected, France and Germany have both announced they will be heading in to one-month national lockdowns in response to the ongoing billowing in positive Covid tests outcomes and concerns that the more serious cases will overwhelm hospitals. They join Ireland and Wales in lockdown, and the trend across Europe is toward ever tighter restrictions. It seems probable that more European nations will go into national lockdowns, with the likes of Poland, Belgium, Spain and Italy looking on the verge. The World Health Organisation declared that the northern hemisphere is at a critical juncture given seasonal vectors, while herd immunity proponents, who advocate reopening economies with focused protection of vulnerable groups, aren't getting a look in. The prospects of larger fiscal stimulus, and the fact that the world is moving closer to having vaccinations for Covid (the feedback from testing among leading candidates has so far been optimistic), will give investors a way of looking beyond the current predicament, so there seems grounds to expect a strong bounce global equity markets, which would see the dollar and yen decline versus other currencies. Next week's U.S. election presents an event risk for markets, although according to the Washington Post it would take a massive polling error, and one larger than some states saw in 2016, to see Trump returned as President, while polls suggest the Democrats will take the Senate and remain the dominant party in the House. A Democratic sweep would herald in a much more expansive U.S. fiscal policy trajectory.

    [EUR, USD]
    EUR-USD settled around the 1.1750 mark, up on yesterday's 1.1717 low. EUR-JPY is also up on yesterday's low with both the dollar and yen correcting a little after rallying on a safe haven bid. As expected, France and Germany have both announced they will be heading in to one-month national lockdowns in response to the ongoing billowing in positive Covid tests outcomes and concerns that the more serious cases will overwhelm hospitals. They join Ireland and Wales in lockdown, and the trend across Europe is toward ever tighter restrictions. It seems probable that more European nations will go into national lockdowns, with the likes of Poland, Belgium, Spain and Italy looking on the verge. The World Health Organisation declared that the northern hemisphere is at a critical juncture given seasonal vectors. While last week's successful first joint EU offering of social bonds, which will finance a jobs program, attracted foreign capital and shored up the reputation of the euro, EUR-USD downside possibilities have become more pronounced on the Covid situation in Europe. Next week's U.S. election presents an event risk for markets, although according to the Washington Post it would take a massive polling error, and one larger than some states saw in 2016, to see Trump returned as President, while polls suggest the Democrats will take the Senate and remain the dominant party in the House. A Democratic sweep would herald in a much more expansive U.S. fiscal policy trajectory, although this would be counterbalanced by a policy bias to more restrictive Covid-containment measures. On balance, and with the ECB taking a more pronounced dovish stance, we remain bearish on EUR-USD at this juncture.

    [USD, JPY]
    The yen has softened moderately after rallying strongly yesterday. Short-term speculative participants accumulated large short exposures in USD-JPY and more particularly in various yen crosses, such as CAD-JPY, and there has naturally been some impetus to book profits with U.S. and European equity index futures finding a footing after yesterday's rout. USD-JPY settled in the lower-to--mid 104.00s, above yesterday's five-week low at 104.11. The dominant directional force on the Japanese currency will likely remain shifting risk premia in global markets. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, is recognized in the currency market and has established the yen as a low-beta haven currency.

    [GBP, USD]
    The pound has continued to trade neutrally, lacking domestically-driven directional impetus. The UK currency was a big underperformer during the global lockdowns earlier in the year, and is again vulnerable given the trend to ever tighter restrictions and national lockdowns across both the UK and Europe. The UK needs foreign capital inflows to offset outflows generated by the UK's large current account deficit. The Brexit endgame is also in the mix. Negotiations are continuing, and the teams are reportedly working to a mid-November deadline. Market participants are cautiously optimistic that at least a narrow free trade deal will be reached, but still await concrete news that the two sides have reached a breakthrough on the key sticking points. With a no deal scenario now looking much less of a risk, the question now is more focused on how limited or how broad a deal might be between the EU and UK. The consensus is for a narrower rather a broader deal, and we concur with this, though it should also be considered that the EU and UK might conceivably surprise everyone with a much more comprehensive deal than is generally being expected. The Covid situation may be a motivation for this, and it should be remembered that the two sides are starting from perfect equivalence, so a broad agreement is feasible. Even some Brexit ideologues in the UK have suggested that maintaining close alignment with EU rules -- for now -- may be the more pragmatic way forward given the Covid crisis, before diverging from EU rules in an evolving process over time. The central criteria for the pound's future trajectory will be what impact any deal has on the UK's terms of trade. The narrower any trade deal is, the bigger the impact on the UK's trading position will be on January 1.

    [USD, CHF]
    The Swiss franc has been trading with a firming bias, consistently rebounding from bouts of weakness in recent months and briefly driving the EUR-CHF cross to levels under 1.0700 for the first time in three months. Markets are anticipating revamped monetary easing measures from the ECB while factoring in Brexit risk. The franc has a proclivity to ascend on the back of its balance of payments position. The SNB stated at its quarterly monetary policy review last month that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market."

    [USD, CAD]
    USD-CAD has settled off yesterday's three-week high at 1.3335. CAD-JPY has also lifted after dropping sharply yesterday, when oil prices tumbled. Oil prices look likely to remain suppressed given the supply glut and weakening demand as Covid-containing measures intensify across Europe and some parts of North America. This backdrop should in turn keep USD-CAD underpinned. The pair has been trending lower since March, though we have been noting trend derailing risks. A run to levels around 1.3500 and above seems plausible.

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