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By XE Market Analysis September 7, 2020 4:23 am
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    XE Market Analysis: Europe - Sep 07, 2020

    A sleepy market was stirred by a drop in the pound, prompted by reports, initially by the FT, that the UK government is planning to unpick parts of the withdrawal agreement that was signed with the EU in January, including elements of the special arrangements for Northern Ireland that are legally binding. A government source cited by the Guardian newspaper said that the move would likely derail this week's round of trade negotiations with Brussels, while a spokesperson downplayed the move as being a "fallback option" in the event a deal can't be reached. PM Johnson set October 15th as the deadline to reach agreement with the EU on trade, stating that the UK would "move on" in the event of a no-deal, which would be a "good outcome." Overall, this ups the ante -- making the no-deal threat tangible. Regular negotiations between the respective sides representatives Frost and Barnier are now likely to be rendered useless (if they weren't already); political leaders on both sides of the Channel will be deciding the Brexit endgame. Cable dropped just over 0.6% to a 1.3202 low, but remained above the post-payrolls 11-day low that was see on Friday at 1.3175. EUR-GBP rallied by over 0.5% in printing a one-week high at 0.8960. The pound saw a similar magnitude of declines against other currencies. Elsewhere, the dollar and other currencies have been plying narrow ranges in thin, early-week trading. The dollar saw and up-then-down price action in the wake of the overall better than expected U.S. August jobs report, which saw yields rise across the curve in a steepening shape. The dollar might have rallied more were it not for the Fed having recently codified the lower-for-longer rate protocol, and Fed Chair Powell assured, after the data on Friday, that the Fed won't prematurely withdraw support while noting that the recovery will "get harder from here."

    [EUR, USD]
    EUR-USD has settled in the mid 1.1800s after recouping from the post-U.S. payrolls low at 1.1781. The overall better than expected U.S. August jobs report saw yields rise across the curve in a steepening shape. The dollar might have rallied more were it not for the Fed having recently codified the lower-for-longer rate protocol, and Fed Chair Powell assured, after the data on Friday, that the Fed won't prematurely withdraw support while noting that the recovery will "get harder from here." The focus shifts to the ECB meeting on Thursday after bearish members of the governing council recently voiced their concern about uptrend in EUR-USD . While we expect a strengthening of the "low for longer" message, hopes of a clear signal of additional easing or even further rate cuts are likely to be disappointed. ECB hawk, Wunsch, said on Friday that dovish expectations for Thursday's meeting risk overshooting. We expect EUR-USD trading to be two-sided into the ECB council meeting.

    [USD, JPY]
    USD-JPY has continued to ply a narrow range in the lower-to-mid 106.00s. The 106.00 level roughly marks the midway point of the range that's seen seen over the last month. Most yen crosses have settled after dropping quite sharp amid the Wall Street led tumble in global stock markets, which elicited a degree of safe haven demand for the Japanese currency. In the bigger picture, most yen crosses have been trending higher since May, with the Japanese currency tracking inversely with global stock market direction. The yen is likely to remain apt to directional change on the back of 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 profile of being a low-beta haven currency. With risk appetite among market participants high, fuelled by massive monetary and fiscal stimulus efforts worldwide, the yen has been trending lower (ex USD-JPY). This looks likely to remain the case for now.

    [GBP, USD]
    The pound has come under pressure amid reports, initially by the FT, that the UK government is planning to unpick parts of the withdrawal agreement that was signed with the EU in January, including elements of the special arrangements for Northern Ireland that are legally binding. A government source cited by the Guardian newspaper said that the move would likely derail this week's round of trade negotiations with Brussels, while a spokesperson downplayed the move as being a "fallback option" in the event a deal can't be reached. PM Johnson set October 15th as the deadline to reach agreement with the EU on trade, stating that the UK would "move on" in the event of a no-deal, which would be a "good outcome." Overall, this ups the ante -- making the no-deal threat tangible. Regular negotiations between the respective sides representatives Frost and Barnier are now likely to be rendered useless (if they weren't already); political leaders on both sides of the Channel will be deciding the Brexit endgame. Cable dropped just over 0.6% to a 1.3202 low, but remained above the post-payrolls 11-day low that was see on Friday at 1.3175. EUR-GBP rallied by over 0.5% in printing a one-week high at 0.8960. The pound saw a similar magnitude of declines against other currencies.

    [USD, CHF]
    EUR-CHF last week once again failed to sustain gains above the 1.0800 level, returning to familiar levels in the mid 1.0700s. This is a pattern that has been repeating for about six weeks now. Last week the cross spiked sharply, on Tuesday, to a three-month peak at 1.1882. The rally was concomitant with EUR-USD soaring into 28-month high territory above 1.2000. Robust manufacturing data from most key global economies, and global stock market gains may have also helped weaken the low beta, safe haven Swiss franc. The influence of the SNB's intervening hand may have been at play during the recent upside bursts. Total Swiss sight deposits of francs have risen by over 130 bln since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. EUR-CHF still remains below the seven-month peak that was seen in early June at 1.0921. One downside risk for EUR-CHF is the Brexit endgame, which is fast approaching. The latest reports suggest the EU and UK are in a total impasse just one month before a deal has to be struck before the UK leaves the EU's single market at year-end. The risk is that the two sides will reach only a bare bones deal, or even no deal at all. The prospect for this would be de-stabilising for both the pound and euro, and would likely underpin the franc.

    [USD, CAD]
    USD-CAD has lifted back above 1.3100 after closing out on Friday at 1.3061. The pair remains below the 1.3141 high that was seen following the release of the August jobs reports out of both the U.S. and Canada. The U.S. report was better relative to expectations. USD-CAD has put in some distance after posting an eight-month low last Tuesday at 1.2992. The basing in the pair, which has been trending lower since March, coincided with a 10%-plus drop in oil prices last week. The stalling out in the recovery pace of the global economy, large crude stockpiles, and uncertainty about Chinese demand (which has been importing crude in record quantities in recent months, but may now be ready to slow this process down) has weighed on oil prices. This backdrop should keep USD-CAD on an steady-to-upward bias for now.

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