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By XE Market Analysis September 10, 2020 3:57 am
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    XE Market Analysis: Europe - Sep 10, 2020

    The dollar has been on the ebb, inversely correlating with the strong rebound on Wall Street yesterday, which spilled over to most Asian stock markets today. The USD index (DXY) drifted to a two-day low at 93.07, while EUR-USD etched out a three-day high at 1.1836, extending the rebound from yesterday's one-month low at 1.1753. Cable lifted to a two-day high at 1.3036, extending gains out of the six-week low that was seen yesterday at 1.2884. The pound has been steady against the euro, but slightly firmer against the yen and Aussie dollar, recouping poise after recent Brexit-related underperformance. According to the UK tabloid The Sun, the motivation for the government to bring legislation that overrides some parts of the EU Withdrawal Agreement was catalysed by what it understood to be "veiled threats" made by the EU chief negotiator Barnier's team that the EU could ultimately ban exports of food into Northern Ireland from other parts of the UK in the even of a no-deal scenario. High level officials will be meeting today via the EU-UK Joint Committee, at the request of the European Commission. What's now clear is that the UK government is going for the jugular, attempting to turn an inherently weak negotiating position into a stronger one by making it clear that it is quite prepared for a no-deal exit from the single market -- even if it means a hard border on Ireland. The UK won't back down in today's talks, which will likely spark fresh declines in the pound. On the one hand UK PM Johnson is gambling that heads of state will cede ground, which looks a tall order as it would only take one EU member country to veto to scupper any agreement, and on the other hand, he and his Brexit-idealogue filled cabinet, are looking serious about leaving without a deal. There are domestic considerations, too, as Johnson's move is stressing relations with UK member countries, while the House of Lords (the second chamber in Parliament) would have grounds to block the legislation on the grounds it breaks international law. Elsewhere in the currency realm, USD-JPY has continued a narrow orbit of the 106.00 level, which roughly marks the midway point of a range that's been prevailing since early August. Yen crosses have also been seeing narrow ranges.

    [EUR, USD]
    EUR-USD etched out a three-day high at 1.1836, extending the rebound from yesterday's one-month low at 1.1753. The move reflected an ebb in the dollar, which has inversely correlated with the strong rebound on Wall Street yesterday, which spilled over to most Asian stock markets today. The USD index (DXY) drifted to a two-day low at 93.07. The ECB and Brexit are jointly at front and centre for markets today. Regarding the ECB, dovish members of the governing council have recently expressed their disquiet about the recent sharp gains EUR-USD saw, which last culminated with the euro reaching 28-month highs above 1.2000. This came after the Fed made its regime shift, which is now focused on stirring inflation as well as capping it, depending on the circumstance. The ECB is amid a strategy review, given the chronic undershooting of inflation, but is not expected to complete it until next year. We think the best markets can hope for is a strengthening of the low for longer message, although the door to additional measures will remain open against the background of ongoing lockdown disruptions and the increasingly real chance of a no-deal Brexit scenario. It looks unlikely that the ECB's message today inspire euro selling, as a dovish lean is anticipated by participants. On the Brexit front, the risks of the UK leaving the single market without a new deal are now palpable following the UK government's introduction of legislation that will overwrite parts of the EU Withdrawal Agreement. The recent sharp gains in EUR-GBP, which rallied back above 0.9100 for the first time since July, shows that the market is ascribing asymmetrical risk between the EU and UK from the consequences of a no-deal Brexit. Today's U.S. focus will be on the initial jobless claims data where we're forecasting a 21k slip to 860k after the 130k decline to 881k previously.

    [USD, JPY]
    USD-JPY has continued a narrow orbit of the 106.00 level, which roughly marks the midway point of a range that's been prevailing since early August. Yen crosses have also been seeing narrow ranges. The ECB meeting and the extraordinary meeting of the UK-EU Joint Committee today have been cause for market participants to sit on their hands. A dovish signal is expected from the former, while the EU, angry at the UK government's legislation that unilaterally overwrites parts of the Withdrawal Agreement, thereby breaking international law, is demanding answers. Japanese data today showed core machinery orders rising by a more than expected 6.3% m/m, though to little market impact. 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 a low-beta haven currency.

    [GBP, USD]
    Cable lifted to a two-day high at 1.3036, extending gains out of the six-week low that was seen yesterday at 1.2884. The pound has been steady against the euro, but slightly firmer against the yen and Aussie dollar, recouping poise after recent Brexit-related underperformance. According to the UK tabloid The Sun, the motivation for the government to bring legislation that overrides some parts of the EU Withdrawal Agreement was catalysed by what it understood to be "veiled threats" made by the EU chief negotiator Barnier's team that the EU could ultimately ban exports of food into Northern Ireland from other parts of the UK in the even of a no-deal scenario. High level officials will be meeting today via the EU-UK Joint Committee, at the request of the European Commission. What's now clear is that the UK government is going for the jugular, attempting to turn an inherently weak negotiating position into a stronger one by making it clear that it is quite prepared for a no-deal exit from the single market -- even if it means a hard border on Ireland. The UK won't back down in today's talks, which will likely spark fresh declines in the pound. On the one hand UK PM Johnson is gambling that heads of state will cede ground, which looks a tall order as it would only take one EU member country to veto to scupper any agreement, and on the other hand, he and his Brexit-idealogue filled cabinet, are looking serious about leaving without a deal. There are domestic considerations, too, as Johnson's move is stressing relations with UK member countries, while the House of Lords (the second chamber in Parliament) would have grounds to block the legislation on the grounds it breaks international law.

    [USD, CHF]
    EUR-CHF has ebbed back to familiar levels in the mid 1.0700s after the latest drop back from forays above the 1.0800 level. The cross has repeatedly failed to sustain gains above 1.0800 over the last couple of months. 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 posted a two-day low at 1.3129 amid broad, albeit moderate, dollar softness. Oil prices have stabilized over the last day following the 17%-odd tumble from last week's highs, which has taken the pressure of the oil-correlating currencies, such as the Canadian buck. The flattening out in the recovery pace of the global economy, juxtaposed to large global 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), caused the rotation lower in oil prices.

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