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By XE Market Analysis September 22, 2020 4:11 am
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    XE Market Analysis: Europe - Sep 22, 2020

    The dollar and yen have remained firm but mostly off Monday's highs. The Australian dollar has been the only mover of note out of the main currencies we track, falling to new lows after RBA deputy governor Debelle said that the central bank is watching the currency "carefully" and that forex intervention is a policy option, as is negative interest rates (while stressing that this doesn't mean it's on the table). AUD-USD hit a low at 0.7193, which is 1 pip shy of the four-week low that was pegged on September 9th, while AUD-JPY posted a fresh seven-week low at 75.18. Elsewhere, EUR-USD drifted slightly lower but remained above yesterday's seven-week low at 1.1731. Cable also remained heavy, but also left yesterday's low unchallenged. USD-JPY settled in the mid 104.00s after rebounding out of yesterday's six-month low at 104.00. EUR-JPY also traded above yesterday's low, though ebbed back under 123.00 after peaking at a rebound high at 123.35. A risk-off theme has continued in global markets, although price changes in assets and currencies have moderated somewhat today relatively to yesterday. This backdrop is supportive for the dollar and yen, though some market narratives are pointing to a rise in some inflation-adjusted (aka real) JGB yields as being yen positive. Japanese markets reopened from a long weekend. The Nikkei 225 managed a modest gain, but this was the exception as most Asian markets continued to drop, and some quite sharply (South Korea's KOPSI, for instance, racking up a loss of over 2.5%). S&P 500 minis have also declined in its overnight session, although only moderately. Most commodity prices have managed to steady, however, and the pace of declines in global stocks has, overall, lessened. Nonetheless, the prevailing bias across markets is one of caution. Many European countries are implementing restrictions in the face of a surging coronavirus case-demic (still no significant correspondence in a public health issues, i.e. hospitalisations, mortality), which has clobbered stocks in the airline and hospitality sectors. The U.S. Congress remains deadlocked over the size and shape of a new fiscal support bill, while uncertainty about the upcoming U.S. election is also causing market participants to tread cautiously.

    [EUR, USD]
    EUR-USD drifted slightly lower but remained above yesterday's seven-week low at 1.1731. The prevailing bias is bearish: Market participants have on net re-discovered the dollar's safe haven credentials (U.S. Treasuries remaining the biggest, most liquid packing place in the world), the ECB has engaged in verbal intervention and, more importantly, many European nations are implementing the tightest restrictions since the March-April lockdowns amid a surge in positive test results for the coronavirus. In addition to the situation in Europe, there is deadlock in the U.S. Congress over the size and shape of a new fiscal support bill, uncertainty about the upcoming U.S. election, still deteriorating relations between the West and China, and equity markets amid a rapid adjusting process vis-a-vis over-rich valuations relative to evolving realities. A big focus should now be on the coronavirus situation, especially in Europe. The results of phase-3 trials in many leading candidate vaccinations will be coming in over the next couple of months. At the same time, proponents of herd immunity may yet be proved right, and within several months from now. The herd immunity camp (much diminished and derided in most media platforms on the grounds of being irresponsible), have been arguing that incoming data -- specifically the discordance between rising cases and low level incidence of illness and mortality (allowing for a three-week lag) -- are showing a much higher level of population immunity than is generally being assumed. Aside from Sweden, notable proponents of the herd immunity thesis (which also argues for the aggressive protection of vulnerable groups) include Nobel prize winning Harvard University professor of structural biology Michael Levitt, and University of Oxford's infectious disease epidemiologist Sunetra Gupta. Good news from the vaccine front, and/or confirmation of the herd immunity hypothesis, would be a massive tonic for global markets, which would likely translate to higher EUR-USD levels. For now, though, the prevailing bias is to the downside.

    [USD, JPY]
    USD-JPY has settled in the mid 104.00s after rebounding out of yesterday's six-month low at 104.00. EUR-JPY is also up on yesterday's low, though has ebbed back under 123.00 after peaking at a rebound high at 123.35. AUD-JPY, meanwhile, posted a fresh seven-week low at 75.18, with the Aussie underperforming after RBA deputy governor Debelle said that the central bank is watching the currency "carefully" and that forex intervention is a policy option, as is negative interest rates (while stressing that this doesn't mean it's on the table). A risk-off theme has continued in global markets, which is supportive of the yen, although price changes in assets and currencies have moderated somewhat today relatively to yesterday. Some market narratives are pointing to a rise in some inflation-adjusted (aka real) JGB yields as being yen positive. Japanese markets reopened from a long weekend. The Nikkei 225 managed a modest gain, but this was the exception as most Asian markets continued to drop, and some quite sharply (South Korea's KOPSI, for instance, racking up a loss of over 2.5%). S&P 500 minis have also declined in its overnight session, although only moderately. Most commodity prices have managed to steady, however, and the pace of declines in global stocks has, overall, lessened. Nonetheless, the prevailing bias across markets is one of caution. Many European countries are implementing restrictions in the face of a surging coronavirus case-demic (still no significant correspondence in a public health issues, i.e. hospitalisations, mortality), which has clobbered stocks in the airline and hospitality sectors. The U.S. Congress remains deadlocked over the size and shape of a new fiscal support bill, while uncertainty about the upcoming U.S. election is also causing market participants to tread cautiously. The Japanese 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 has remained heavy, with Cable tipping under 1.2800 and approaching the recent two-month low at 1.2763. The pound was a notable underperformer during the acute risk-off phase earlier in the year due to the mix of the UK being an exposed, open economy with a large current account deficit, and a similar line of reasoning is appearing in some market narratives now, with global stock markets dropping as rich valuations clash with the evolving new reality of Covid-related lockdowns and uncertainty about the U.S., along with a diminishing outlook for perpetual fiscal stimulus. In the UK, coronavirus cases and corona-panic are surging. Localised lockdowns are now affecting 10 million people in the UK, and the government is set to announce further restrictions. This is a negative backdrop for the pound as it combines with the uncertainty surrounding the Brexit endgame. The minutes from the BoE MPC meeting last week affirmed 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 cost it would entail. This view has been, at least up until now, 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 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 sharply 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 printed a fresh seven-week high at 1.3332, which is the culmination of a three-trading-day run higher from levels around 1.3150. A sharp drop in oil and other commodity prices yesterday has been weighing on the Canadian currency. Oil prices have settled above yesterday's lows, though remain about 4% down on the week. The re-restriction trend in Europe amid a surge in positive coronavirus test results there, along with uncertainties into the November U.S. elections (which will have major implications on the course of U.S. fiscal policy, among other policy biases), have been generating a more cautious overall mindset among market participants. And while participants are seeing discordance in sky-high equity market valuations, particularly in the U.S., relative to evolving realities, they are also seeing some discordance in oil prices relative to the deteriorating outlook for demand, especially with news of a potential return to production of major oil producing facilities in Libya. Another tropical storm on the Gulf of Mexico has for the third time this seasons caused the idling of facilities in the region, hasn't be a sufficiently strong countervailing force to lift oil prices, only to mitigate declines. In sum, USD-CAD looks set for further gains, though shorting CAD-JPY would look the better route for those bearish on the Canadian dollar.

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