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By XE Market Analysis October 30, 2020 5:31 am
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    XE Market Analysis: Europe - Oct 30, 2020

    The dollar has steadied after rallying in recent days, which has helped EUR-USD find a footing after tumbling to a one-month low at 1.1650 yesterday. EUR-JPY, however, fell to a near-four-month low, and GBP-JPY to a fresh one-month low, even though USD-JPY has remained above the five-week low it saw yesterday at 104.03. The trend to toward national lockdowns in Europe as a countermeasure to spiralling Covid cases is pressuring the European currencies, with markets anticipating double-dip recession risk in Europe, and with the ECB and other central banks in the region levelling-up monetary accommodation. The currencies of the open economies of Sweden and Norway, with the latter's also being a correlate of oil prices, have been particularly hard hit. Global market sentiment remains distinctly quavery, which has been generating safe haven demand for the yen. U.S. Treasury yields have dipped back after rising yesterday. The S&P 500 E-mini has racked up a near 2% loss after the cash version of the index closed on Wall Street yesterday with a 1.2% gain. The MSCI Asia-Pacific index is down for a third consecutive day, although outperforming North American and European indices. Most commodity prices are down, with front-month WTI oil futures down over 1%, although so far remaining above the four-and-a-half-month low that was seen yesterday just below $35. Crude prices are down by over 10% from week-ago levels, and look set to continue lower due to demand destruction as France and German head into one-month lockdowns, and with more European countries looking on the verge of following. The World Health Organisation declared this week that the northern hemisphere is at a critical juncture with the Covid-19 coronavirus given seasonal vectors. Oil-correlating currencies, such as the Canadian dollar and Norwegian krone are likely to continue to trend lower against haven currencies like the yen. The pound has been trading neutrally relative the euro. European Commission president, von der Leyen, yesterday reported "good progress" in trade talks with the UK. The two sides are reportedly working to a mid-November deadline. Another focus is the U.S. elections, which are up on Tuesday. Polls point to a Democratic sweep (winning the House, the Senate and the Presidency), though it should be considered there was a large polling error in 2016, and there is a risk that Trump will contest the result should he lose, which would create chaos and uncertainty with a consequence of delaying fiscal stimulus.

    [EUR, USD]
    EUR-USD found a footing after tumbling to a one-month low at 1.1650 yesterday, though EUR-JPY fell to a near-four-month low. The trend to toward national lockdowns in Europe as a countermeasure to spiralling Covid cases is pressuring the European currencies, with markets anticipating double-dip recession risk in Europe, and with the ECB and other central banks in the region levelling-up monetary accommodation. The currencies of the open economies of Sweden and Norway, with the latter's also being a correlate of oil prices, have been particularly hard hit. The prospects of larger macro stimulus in Europe and elsewhere, and the fact that the world seems to be moving closer to having vaccinations for Covid -- the feedback being mostly optimistic from advanced-stage trials of leading candidate, with Pfizer reporting this week that its version could be ready before year end -- will give investors a way of looking "across the valley" and beyond the current predicament, though anticipating the timing of when this may be is tricky with the trend in Europe moving toward further restrictions and more national lockdowns that could easily be extended beyond the planned duration. The World Health Organisation declared that the northern hemisphere is at a critical juncture with regard to the Covid-19 coronavirus, given seasonal vectors. This backdrop should maintain the European currency weakening trend for now. The Brexit situation warrants monitoring. European Commission president, von der Leyen, yesterday reported "good progress" in trade talks with the UK. The two sides are reportedly working to a mid-November deadline. Another focus is the U.S. elections, which are up on Tuesday. Polls point to a Democratic sweep (winning the House, the Senate and the Presidency), though it should be considered there was a large polling error in 2016, and there is a risk that Trump will contest the result should he lose, which would create chaos and uncertainty with a consequence of delaying fiscal stimulus.

    [USD, JPY]
    The yen is firmer today after softening versus the dollar yesterday, though has remained off the five-month high that was seen yesterday (USD-JPY's five-week low, at 104.03). The Japanese currency's strength, meanwhile, propelled EUR-JPY to a new near-four-month low and GBP-JPY to a fresh one-month low. AUD-JPY and CAD-JPY also came under pressure, though both has so far remained above their respective trend lows that were seen yesterday. Global market sentiment remains distinctly quavery, which in turn generating safe haven demand for the yen. 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, has established the yen as a low-beta haven currency.

    [GBP, USD]
    The pound has continued to trade neutrally relative to the euro, 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 tightening 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]
    EUR-CHF has this week been pulled under 1.0700 by broad declines in the euro and with the ECB levelling-up monetary accommodation. The ECB's policy course is in effect supplementing the Swiss currency's chronic firming bias by weakening the euro, with the EUR-CHF cross being a proxy of the franc's trade-weighted exchange rate. The franc has a fundamental underpinning rooted in Switzerland's strong balance of payments position, which features a large current account surplus to GDP. Switzerland also has the status of having the second highest GDP per capita in the world. While the SNB implements a punishing -0.75% deposit rate, real interest rates are still lower in the U.S. than they are in Switzerland, which is mathematically bearish for the nominal USD-CHF exchange rate, all else equal (and albeit very modest). Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off large speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank stated at its last quarterly monetary policy review 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 in the lower 1.3300s after yesterday rallying to a one-month peak at 1.3391. CAD-JPY, which, along with NOK-JPY, has been our favoured short, has ebbed back today, though has so far remained above the three-month low that was pegged yesterday. 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 trend-derailing forces are now bearing down. A further run higher, to levels around 1.3500 and above still seems plausible. The risk to this view would be if global markets started looking "across the valley" of the prevailing Covid predicament, especially with more stimulus in the pipeline in major economies. Getting on the other side of the U.S. election would help, as this, assuming the outcome wasn't contested, would clear the way for fiscal stimulus in the world's biggest economy. Vaccination hopes for Covid-19 may also play a role with advanced-stage trials of leading candidates reportedly going well (Pfizer said its vaccine may be ready before year-end), though the trend for now remains toward further restrictions and lockdowns in Europe, which should keep oil prices and oil-correlating currencies pressured.

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