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By XE Market Analysis September 23, 2020 4:12 am
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    XE Market Analysis: Europe - Sep 23, 2020

    The yen has been trading mixed today. USD-JPY edged above 105.00, while EUR-JPY and other yen crosses have traded softer. AUD-JPY fell by 0.5%, foraying further into 10-week low terrain, as expectations for another RBA rate cut cement in markets, which has been concomitant with recent declines in iron ore and other commodity prices. In Japan today, BoJ Governor Kuroda stressed that the Fed's recent policy regime change is similar to the stance the Japanese central bank took in 2016, which he described as an overshooting strategy. He said that the BoJ won't hesitate to take additional easing steps if necessary. Evidently, with core CPI at negative y/y rates, the BoJ has had little success in driving inflation higher. 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.

    [EUR, USD]
    EUR-USD fell to an eight-week low at 1.1673. The prevailing bias looks likely to remain 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), although this is a moot point presently given the rebound in global stocks, the ECB has engaged in form of verbal intervention and, more importantly, many European nations are implementing the tightest restrictions since the March-April lockdowns amid a surge in positive coronavirus test results. 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 taking a more circumspect stance vis-a-vis 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, which could pave the way for a rollout as soon as late this year or early next year. At the same time, proponents of the herd immunity thesis could yet be proved right, and the next several months will be key in this regard. The herd immunity camp, while much diminished and derided by most of the large media platforms on the alleged grounds of irresponsibility, have been arguing that incoming data across Europe -- specifically the marked discordance between rising cases and continued low incidence of illness and mortality (allowing for a three-week lag) -- is indicative of a much higher level of population immunity than is generally being assumed. Advocates of this hypothesis point to the 'casedemic' that was seen in the 2008-09 H1N1 flu (aka swine flu) pandemic, where, after the actual public health impact had occurred, massively increased testing into the following 2009-10 winter season yielded a massive rise in cases but not a corresponding rise in illness/deaths. Could we be witnessing 'casedemic number 2' in Europe? Either way, any good news from the vaccine front and/or confirmation of the herd immunity hypothesis, would be a strong tonic for European and global markets.

    [USD, JPY]
    The yen has been trading mixed today. USD-JPY edged above 105.00, while EUR-JPY and other yen crosses have traded softer. AUD-JPY fell by 0.5%, foraying further into 10-week low terrain, as expectations for another RBA rate cut cement in markets, which has been concomitant with recent declines in iron ore and other commodity prices. In Japan today, BoJ Governor Kuroda stressed that the Fed's recent policy regime change is similar to the stance the Japanese central bank took in 2016, which he described as an overshooting strategy. He said that the BoJ won't hesitate to take additional easing steps if necessary. Evidently, with core CPI at negative y/y rates, the BoJ has had little success in driving inflation higher. 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]
    Cable hit a two-month low at 1.2681, marking a 6% decline from the high seen in early September. The pound also saw moderate declines versus the euro and yen, among other currencies, amid a bearish mix of new Covid restrictions in the UK, the upcoming expiry of the government's wage support scheme, and Brexit endgame uncertainties.

    [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 has remained buoyant after pegging a six-week high yesterday at 1.3347. The pair is up by 2.7% from the low that was seen on September 1 just under 1.3000. A generally firmer U.S. dollar and soft oil prices have been supporting. While crude prices have settled above recent lows, they remain down by over 4% on the week. The re-restrictioning 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. Markets are 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. 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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