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By XE Market Analysis September 15, 2020 3:32 am
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    XE Market Analysis: Europe - Sep 15, 2020

    The dollar and yen softened against their peers amid a background theme of mostly higher stock markets. The main U.S. equity indexes closed on Wall Street yesterday with gains of over 1%, and S&P 500 mini is up 0.5% in overnight trading. Most Asia stock markets also gained, though some markets, including Japan and Australia, declined. Positive news on the Covid-19 vaccine and treatment front, news of some mega mergers, along with above-forecast data out of China, including industrial production and retail sales, and the PBoC's liquidity injection of 600 bln yuan via a 1 year MLF, have collectively floated investor spirits. Market participants are also looking to the FOMC, which starts its two-day meeting today, and its policy statement and new Summary of Economic Projections (SEP) on Wednesday. Chair Powell largely pre-empted this meeting in terms of policy with his Jackson Hole announcement of the FOMC's new strategies where it will pursue an average inflation target and monitor any shortfall in employment. We expect upward revision in the Fed's GDP and inflation outlooks, and a downward bump to unemployment, as a consequence of its regime change. The upward revisions to growth may give the dollar a lift, though the lower-for-longer strategy on interest rates may offset. As for the euro, attention will be on the latest ZEW investor sentiment survey, which is the first major confidence data of September. We expect a slight decline in the expectations reading to 71.0 (median 70.0) from 71.5. Nothing yet to shake the ECB's baseline scenario, with Brexit and virus/casedemic developments the key factors that policymakers will be watching closely. Among currencies, the USD index (DXY) printed a five-day low at 92.84, while EUR-USD concurrently pegged a five-day high at 1.1900. USD-JPY flatlined in the mid-to-upper 105.00s. AUD-USD rallied by over 0.5% to a 12-day high at 0.7336. The release of the latest RBA minutes, although stating "a lower exchange rate would provide more assistance to the Australian economy," sparked initial Aussie dollar buying as markets deemed the minutes to be less dovish in overall tone than had been anticipated. The Aussie was subsequently given a further lift by above forecast Chinese data. Sterling remained heavy, though remained above above recent lows. The UK government's controversial Internal Markets Bill was passed in the House of Commons, and will now go the House of Lords.

    [EUR, USD]
    EUR-USD pegged a five-day high at 1.1900, reflecting broad dollar softness. The euro has also firmed against a generally soft yen, though has lost ground to the outperforming Aussie dollar. Against other currencies, the common currency has been trading neutrally, for the most part. Market participants are looking to the FOMC, which starts its two-day meeting today, and its policy statement and new Summary of Economic Projections (SEP) on Wednesday. Chair Powell largely pre-empted this meeting in terms of policy with his Jackson Hole announcement of the FOMC's new strategies where it will pursue an average inflation target and monitor any shortfall in employment. We expect upward revision in the Fed's GDP and inflation outlooks, and a downward bump to unemployment, as a consequence of its regime change. The upward revisions to growth may give the dollar a lift, though the lower-for-longer strategy on interest rates may offset. As for the euro, attention will be on the latest ZEW investor sentiment survey, which is the first major confidence data of September. We expect a slight decline in the expectations reading to 71.0 (median 70.0) from 71.5. Nothing yet to shake the ECB's baseline scenario, with Brexit and virus/casedemic developments the key factors that policymakers will be watching closely. A potential euro negative is the implementation of new restrictions and localized lockdowns in response to a surge in new coronavirus cases in some large European countries. There are some grounds, put forward by credible scientists although as yet well outside mainstream thinking, to argue that this is a "case-demic" and not a pandemic, given the lack of corresponding public health impact, which is to say hospitalisations and deaths. A casedemic was seen in the 2009 H1N1 (aka swine flu) episode, which went from genuine pandemic (significant deaths) to a huge casedemic (sharply rising cases but very low impact in terms of deaths). A casedemic is caused by ramping higher testing, error rates in test results (i.e. false positives), and prevalence of asymptomatic or mild-symptom cases.

    [USD, JPY]
    USD-JPY has been flatlining in the mid-to-upper 105.00s, consolidating yesterday's decline from levels above 106.00. Most yen crosses, meanwhile, are firmer, partly reflecting broader softness in the Japanese currency following the rally on Wall Street yesterday and amid gains seen on most Asian stock markets today. Data out of China, including industrial production and retail sales, beat expectations and the PBOC injected 600 bln yuan via a 1 year MLF, which helped maintain a mostly risk-on vibe in Asia. As expected, Yoshihide Suga is set to become the new prime minister of Japan, replacing Shinzo Abe, who stepped down on medical grounds. Suga will confirmed in the Diet on Wednesday. No major changes to prevailing policies would be expected should he indeed be confirmed as the new PM. He is a supporter of 'Abenomics'. Large fiscal stimulus is already in the works, and the close relationship between government and the BoJ will 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 an established profile of a low-beta haven currency.

    [GBP, USD]
    Sterling has remained heavy, though above above recent lows. The UK government's controversial Internal Markets Bill was passed in the House of Commons, and will now go the House of Lords. We view the pound's rally yesterday as a dead cat bounce. EU-UK and intra-UK tensions are running high due to the UK government's gambit to unilaterally amend the EU Withdrawal Agreement. The EU has delivered an ultimatum to reverse the decision, the UK said it won't, and Brussels is delaying, according to Reuters, its decision on UK access to euro clearing operations. There has been, meanwhile, a surge in coronavirus cases in the UK, like other countries in Europe, which has led the UK government to introduce fresh nationwide social restrictions and impose a lockdown on the country's second biggest city, Birmingham. The UK's pandemic-era wage support scheme is also due to expire in October, and the government's official line is that it is not going to be extended. As for the Japan trade deal that was signed in principle on Friday, the deal largely mirrors the deal the UK has with Japan, and won't mark significant change (estimated at +0.07% to GDP over 15 years). Deals with other countries are being worked on, but it will take years for the UK to replicate/improve on the arrangements it had as a member of the EU and single market. A limited trade deal with the EU seems the best that can be hoped for, which is likely to be thrashed out in October when state leaders, rather than trade envoys, become directly involved. The risk of a no-deal exit from the single market at year-end has risen sharply over the last week.

    [USD, CHF]
    EUR-CHF has plying a narrow range in familiar levels in the mid 1.0700s. 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 been plying a narrow range in the mid 1.3100s, below the three-week high that was seen last Wednesday at 1.3261. Oil prices have stabilized in recent days following a near 20% tumble, which has arrested the recent decent in oil-correlating currencies, such as the Canadian dollar. 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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