Home > XE Currency Blog > XE Market Analysis: Europe - Sep 18, 2020

AD

XE Currency Blog

Topics7440 Posts7485
By XE Market Analysis September 18, 2020 3:37 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5364
    XE Market Analysis: Europe - Sep 18, 2020

    The dollar has scraped out a two-day low at 92.82 in the narrow trade-weighted (DXY) index, with EUR-USD concurrently pegging a two-day high at 1.1862, gaining quite sharply from yesterday's five-week low at 1.1737. A steadying in stock markets today has seen the dollar ebb back, after finding safe haven demand during the worst of this week's sharp sell-off across global equity markets. The pound has come under modest pressure against most other currencies. Cable posted an intraday low at 1.2941. The WHO is warning of a serious second wave of SARS-CoV-2 in Europe on the back of a surge in new cases (despite data showing continued very low rate of death alongside a relatively low incidence of Covid being listed on the death certificates of those passing from other contagious respiratory disease). In the UK, coronavirus cases and, with it, corona-panic are surging. Localised lockdowns are now affecting 10 million people in the UK, and the government's scientific advisory group are, according to an FT report, advising the government to implement a two-week national lockdown. This is a negative backdrop for the pound, adding to the uncertainty surrounding the Brexit endgame, and with the minutes from the BoE MPC meeting yesterday affirming that the central bank is at full steam on contingency planning for negative interest rates (along stressing that it is not ready to do so yet). Elsewhere, USD-JPY has settled in the upper 104.00s, above the seven-week low seen yesterday at 104.52. Yen crosses have also rebounded out of lows. Both EUR-JPY and AUD-JPY lifted above their respective Thursday highs. Japan's core CPI came in at at -0.4%y/y, matching expectations.

    [EUR, USD]
    EUR-USD pegged a two-day high at 1.1862, gaining quite sharply from yesterday's five-week low at 1.1737. A steadying in stock markets today has seen the dollar retreat, after finding safe haven demand during the worst of this week's sharp sell-off across global equity markets. More ECB policymakers yesterday sounded out dovish signals, with ECB's Rehn saying that inflation has "persistently lingered too low, and there is a risk that this trend will continue," while his colleague Guindos stressed that that the central bank must avoid inflation expectations turning negative, adding that the PEPP program is flexible and can be extended if needed. These remarks follow ECB President Lagarde, who at the weekned mentioned the euro as being a consideration, which walked back the message she have at post-policy meeting press conference in the week before. This is important as it, along with the unexpected appearance of rate hikes, further out, on the Fed's dot plot, should offset the Fed's regime shift to a lower-for-longer policy stance, and in turn limit EUR-USD's upside potential.

    [USD, JPY]
    USD-JPY has settled in the upper 104.00s, above the seven-week low seen yesterday at 104.52. Yen crosses have also rebounded out of lows. Both EUR-JPY and AUD-JPY lifted above their respective Thursday highs. Japan's core CPI came in at at -0.4%y/y, matching expectations. The deflationary problem will keep the BoJ resolutely focused on uber-accommodative monetary policy, while new prime minister, Yoshihide Suga, has signalled that he will be continuing the 'Abenomics' of his predecessor with fiscal spending and structural reform. One of the major problems Suga and the BoJ faces is the rapidly ageing population in Japan, which is itself a disinflationary driver. Suga is known for favouring more immigration. As for the yen, gains this week inversely correlated with the sharp correction in global stock markets. The currency 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]
    The pound is trading neutrally at the moment. Cable posted an intraday low at 1.2941 ahead of the London open before recouping to near net unchanged levels in the upper 1.2400s. In the UK, coronavirus cases and, with it, corona-panic are surging. Localised lockdowns are now affecting 10 million people in the UK, and the government's scientific advisory group are, according to an FT report, advising the government to implement a two-week national lockdown. This is a negative backdrop for the pound, adding to the uncertainty surrounding the Brexit endgame, and with the minutes from the BoE MPC meeting yesterday affirming that the central bank is at full steam on contingency planning for negative interest rates (along with stressing that it is not ready to do so yet). Regarding Brexit, there is a view that PM Johnson has no intention of leaving the UK out of the EU's single market without a deal and reneging on the Withdrawal Agreement, given the significant economic and political damage it would entail. This view is preventing the pound from seeing more extensive losses. We are inclined to agree with it, though it should be remembered that Johnson's cabinet is packed with Brexit ideologues, and the EU is simply not likely to accept the unilateral overwriting of the Withdrawal Agreement. The question whether the EU is willing to accept the UK's Internal Market Bill (which contains legislation that overrides parts of the Withdrawal Agreement) as a bargaining chip (assuming the bill is fully ratified), and what it would be willing to concede to. The Brexit matter will be resolved by heads of state in the run-in to the EU's summit on October 15th-16th.

    [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 posted a two-day low at 1.3135, extending the sharp decline from the eight-day high seen at 1.3248 yesterday. Steadying stock markets, although still shaky, have facilitated a reversal of some of the U.S. dollar's safe haven positioning, while oil prices have continued to rally, which has been supportive of the Canadian dollar. Front-month WIT crude futures hit a two-week high at $41.49, up nearly 15% from the low seen on September 8th at $36.13.

    Paste link in email or IM