Home > XE Currency Blog > XE Market Analysis: Europe - Sep 25, 2020

AD

XE Currency Blog

Topics7440 Posts7485
By XE Market Analysis September 25, 2020 3:15 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5364
    XE Market Analysis: Europe - Sep 25, 2020

    The dollar settled off its Thursday highs in narrow range trading into the London interbank open. EUR-USD saw a less than 15-pip range around 1.1665-75, holding above the two-month low that was seen yesterday at 1.1626. Cable saw a similar price action. USD-JPY edged out a 10-day high at 105.56, superseding yesterday's peak by a couple of pips, before ebbing back moderately. Yen crosses were steady. AUD-JPY plied a narrow range after dropping every day last week and every day this week through to yesterday. The cross, widely seen as a barometer of global investor risk appetite, settled around 74.50, up from the three-month low that was seen yesterday at 73.96. AUD-USD also managed to settle after falling precipitously in recent sessions. Global stock markets remain whippy, mostly gaining in Asia today after Wall Street managed a positive close, which helped lift the dollar bloc currencies out of their lows, but sentiment is uncertain. Focus is on Capitol Hill in the U.S. and progress for a new fiscal support package. Democrats are working on a $2.2 tln package that could be voted on in the House of Reps next week, with the party saying they are ready to negotiate with the White House. New restrictions across Europe amid a surge in positive Covid tests has also been inspiring caution at a global level. But, so far there has been a marked discordance between positive tests and hospital admissions and deaths. The Belgium government on Wednesday announced it was no longer using PCR testing (the dominant form in Covid testing) to gauge the prevalence of Covid, and will be focusing on hospitalisations instead, while also bucking the trend in Europe by announcing a reduction in restrictions. False positives are a know problem in PCR testing, especially when testing programs are ramped higher. If hospital admissions and deaths remain markedly disproportionate to new cases, other nations may start to throttle back on restrictions, which would be a bullish scenario for global markets and the euro.

    [EUR, USD]
    EUR-USD was showing a less than 15-pip range around 1.1665-75, heading into the London interbank open, holding above the two-month low that was seen yesterday at 1.1626. The dollar has recently been underpinned by safe haven demand following steep declines across global equity markets, which have managed to find a footing over the last day. Real T-note yields have also been climbing, albeit moderately, from the lows seen in late August. Focus is on Capitol Hill in the U.S. and progress for a new fiscal support package. Democrats are working on a $2.2 tln package that could be voted on in the House of Reps next week, with the party saying they are ready to negotiate with the White House. The November U.S elections is also a major focus, the net outcome (House, Senate and Presidency) will have major implications for fiscal policy. In Europe, meanwhile, new restrictions across the region have been seen amid a surge in positive Covid tests. But, so far there has been a marked discordance between positive tests and hospital admissions and deaths. The Belgium government on Wednesday announced it was no longer using PCR testing (the dominant form in Covid testing) to gauge the prevalence of Covid, and will be focusing on hospitalisations instead, while also bucking the trend in Europe by announcing a reduction in restrictions. False positives are a know problem in PCR testing, especially when testing programs are ramped higher. If hospital admissions and deaths remain markedly disproportionate to new cases, other nations may start to throttle back on restrictions, which would be a bullish scenario for global markets and the euro.

    [USD, JPY]
    USD-JPY edged out a 10-day high at 105.56, superseding yesterday's peak by a couple of pips, before ebbing back moderately. Yen crosses were steady. AUD-JPY plied a narrow range after dropping every day last week and every day this week through to yesterday. The cross, widely seen as a barometer of global investor risk appetite, settled around 74.50, up from the three-month low that was seen yesterday at 73.96. Global stock markets remain whippy, mostly gaining in Asia today after Wall Street managed a positive close, which helped lift AUD-JPY out of its lows, but sentiment is uncertain. Focus is on Capitol Hill in the U.S. and progress for a new fiscal support package. Democrats are working on a $2.2 tln package that could be voted on in the House of Reps next week, with the party saying they are ready to negotiate with the White House. New restrictions across Europe amid a surge in positive Covid tests has also been inspiring caution at a global level. But, so far there has been a marked discordance between positive tests and hospital admissions and deaths. The Belgium government on Wednesday announced it was no longer using PCR testing to gauge the prevalence of Covid, and will be focusing on hospitalisations instead, while also bucking the trend in Europe by announcing a reduction in restrictions. False positives are a know problem in PCR testing (the dominant form in Covid testing), especially when testing programs are ramped higher. If hospital admissions and deaths remain markedly disproportionate to new cases, other nations may start to throttle back on restrictions. This would be bullish scenario for global markets. 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 has remained buoyant, although below yesterday's 1.2782 high. Firmer equity markets has seen the dollar retreat as safe haven positions unwind. The pound has also seen gains versus the euro over the last couple of days, though pulled back quite sharply after reaching an eight-day high yesterday. The UK government decided to extend its wage support scheme beyond October, though in a much more fugal and targetted way. The Chancellor, Rishi Sunak, warned that it will not stem rising unemployment in the UK, and warned the country faces a winter of business failures due to the impact of Covid restrictions. UK PM Johnson announced new national restrictions this week, which overall weren't as severe as many had been expecting, though will maintain the pressure on the aviation and hospitality sectors in particular. But aside from the national restrictions, localised lockdowns are now affecting 15 million people in the UK. The rate of positive coronavirus test results has continued to surge in the UK, reaching it second highest tally yesterday, as has been happening across Europe, and although there remains a marked discordance between positive tests an actually hospitalisations/mortality, even allowing for the necessary time lag, the government is pursuing a better-safe-than-sorry strategy. Deaths from Covid in the UK over the last week are about 40x lower than they were at the peak in April. Hopes for a vaccine remain buoyant, with data from leading candidate vaccines in late-stage trials due to come in as soon as next month. Regarding Brexit, matter will be resolved by heads of state in the run-in to the EU's summit on October 15th-16th. There is a view that PM Johnson has no intention of leading 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 loaded with Brexit ideologues, and the EU is not likely to accept the unilateral overwriting of the Withdrawal Agreement.

    [USD, CHF]
    EUR-CHF has lifted back above 1.0800. The SNB yesterday repeated, after its quarterly monetary policy review, that the franc remains "highly valued" and said the bank is ready to "intervene more strongly in the foreign exchange market". 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 corrected to the mid 1.3300s after pegging a seven-week high at 1.3419 yesterday. The U.S. dollar has softened against most currencies, while oil prices have lifted moderately, paring losses seen over the last week. Directional risks remain to the upside. New Covid restrictions 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), an continued lack of a new fiscal support package in the U.S., have been generating a more cautious overall mindset among market participants.

    Paste link in email or IM