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By XE Market Analysis September 11, 2020 4:28 am
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    XE Market Analysis: Europe - Sep 11, 2020

    The dollar and yen ebbed moderately, especially against the dollar bloc currencies, which lifted concomitantly with a rebound in U.S. equity index futures after another sharply negative close on Wall Street yesterday. Global stock markets are still set for their first down week since March. In the U.S., the failure of the Senate to gets its "skinny" $500 bln relief measures through a procedural vote seemed to hit a nerve, while Leader McConnell said it was a toss up whether the Republicans would retain the Senate at the upcoming election on November 3. The outcome of the election will have major implications on fiscal policy as the Republican and Democratic parties have significantly different spending and tax policies. The USD index (DXY) settled near Thursday's closing level at 93.34. The dollar's recent price action suggests that markets are looking at it as a safe have once again; falling yesterday, for instance, during the bullish early part of the Wall Street session before subsequently rallying as risk appetite turned sour. EUR-USD settled in the low-to-mid 1.1800s after yesterday's up-then-down price action, which left a nine-day high at 1.1918. The peak was the product of the ECB's signalling yesterday, which gave no indication of further accommodation and disappointing hopes for a dovish slant. ECB chief economist Lane, who a couple of weeks back popped the EUR-USD rally by voicing his disquiet about recent euro gains, said that core inflation projections have been "significantly muted" by the rise in the euro. His rhetoric this time around is not likely to be as impactful as it seems that other council members, including President Lagarde, have a similar but more sanguine view on forex and the negative CPI print in August. USD-JPY has continued a narrow orbit of the 106.00 level. Sterling has found a toehold after dropping sharply yesterday. More declines seem more likely than not. The EU has called the UK government's bluff, demanding it scrap plans to overwrite parts of the Withdrawal Agreement by the end of the month or risk jeopardizing trade talks. Senior UK cabinet minister Michael Gove said the government has made it "perfectly" clear it would not. PM Johnson also confirmed that the wage support scheme will not be extended when it expires next month, while new 'case-demic' restrictions have been introduced. Both threaten to countervail economic recovery in the UK.

    [EUR, USD]
    EUR-USD settled in the low-to-mid 1.1800s after yesterday's up-then-down price action, which left a nine-day high at 1.1918. The peak was the product of the ECB's signalling yesterday, which gave no indication of further accommodation and disappointing hopes for a dovish slant. ECB chief economist Lane, who a couple of weeks back popped the EUR-USD rally by voicing his disquiet about recent euro gains, said that core inflation projections have been "significantly muted" by the rise in the euro. His rhetoric this time around is not likely to be as impactful as it seems that other council members, including President Lagarde, have a similar but more sanguine view on forex and the negative CPI print in August. As for the dollar, recent price action suggests that markets are looking at it as a safe have once again (after a several-month hiatus); falling yesterday, for instance, during the bullish early part of the Wall Street session before subsequently rallying as risk appetite turned sour. The prevailing themes affecting market sentiment may make for a period of choppy trading in EUR-USD, without clear directional bias. The European economic revival is at risk of sputtering as sharply rising levels of diagnostic coronavirus testing is corresponding with sharply rising new cases. So far, there has been no corresponding rise in serious illness, hospitalisations or deaths, which tentatively fits the herd immunity hypothesis; but this is a moot point as governments are responding (imposing new restrictions) to new cases and not actual public health events, which fits the view that pursuing herd immunity while protecting vulnerable groups is irresponsible (despite the evident success of Sweden in this strategy), and that only the involvement of big pharma in producing vaccinations can ultimately save the day. In the the U.S., the failure of the Senate to get its "skinny" $500 bln relief measures through a procedural vote seemed to hit a nerve, while Leader McConnell said it was a toss up whether the Republicans would retain the Senate at the upcoming election on November 3. The outcome of the election will have major implications on fiscal policy as the Republican and Democratic parties have significantly different spending and tax policies. The steady erosion in U.S.-China, and more broadly West-China relations, also remains in play.

    [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 been somewhat choppy in recent days; GBP-JPY has been notable for dropping by nearly 5% from last week's highs, driven by sterling's Brexit-related underperformance. In Japan, the focus is on Monday's leadership election of the ruling LDP party, which will produce the new prime minister after Abe stepped down. Yoshihide Suga is expected to win. Assuming he becomes the new PM, no major changes to prevailing policies would be expected. Large fiscal stimulus is already in the works, he is a support of 'Abenomics', and the close relationship between government and the BoJ would be maintained. 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]
    The pound has steadied after a 2% dive against the dollar from levels prevailing on Wednesday. Cable printed a seven-week low at 1.2773. Against the euro, the pound rallied by 2.2% over the last two days. More declines seem more likely than not. The EU has called the UK government's bluff, demanding it scrap plans to overwrite parts of the Withdrawal Agreement by the end of the month or risk jeopardizing trade talks. Senior UK cabinet minister Michael Gove said the government has made it "perfectly" clear it would not. PM Johnson also confirmed that the wage support scheme will not be extended when it expires next month, while new 'case-demic' restrictions (banning groups of more than six) have been introduced. Both threaten to countervail economic recovery in the UK. The pound is at risk of further, quite possibly substantial declines given the sharp rise in the perceived risk of the UK leaving the single market at year-end without a trade deal, which from the markets perspective is seen as essential in part way mitigating the impact of losing of free and frictionless trade with the EU bloc. The UK government's decision to bring forward proposed legislation that will override parts of the EU Withdrawal Agreement implicitly threatens the peace process in Northern Ireland by the possible return of a hard border on Ireland, and would increase the risk of the UK eventually breaking up. The stakes are high, and Brussels is calling Johnson's bluff. An FT opinion piece suggested that the proposed legislation could once again be "domestic cover for concessions to come," which seems to hit the nail on the head given the stakes and given characteristics of Johnson's government. While trade talks between the EU and UK will continued next week in Brussels, the matter is not likely to be resolved until heads of state get directly involved, which is not likely to be until next month. The deadline will be the EU leaders' summit on October 15th-16th.

    [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 has settled in the mid 1.3100s, below the three-week high that was seen on Wednesday at 1.3261. Oil prices have stabilized in recent days following the 17%-odd tumble from last week's highs, which has arrested the decent in 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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