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By XE Market Analysis September 30, 2020 4:21 am
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    XE Market Analysis: Europe - Sep 30, 2020

    The dollar and yen picked up some safe haven demand during pre-London trading in Asia, though not before printing fresh lows against many currencies. This saw EUR-USD ebb back to a 1.1723 low after earlier printing an eight-day high at 1.1755. EUR-JPY fell back to a low at 123.62 after posting a 12-day peak at 124.26. USD-JPY ebbed back under 105.50 after pegging a 15-day high at 105.81. AUD-JPY dropped from an eight-day high, with AUD-USD seeing a similar price action. The other dollar bloc currencies also came under pressure, as did many currencies from the developing world. USD-CAD edged fractionally above recent highs in posting a near two-month high at 1.3421. The first U.S. presidential debate between Trump and Biden ahead of the November elections raised some concerns about the integrity of the elections, and the possibility that it might be contested, which spooked investors. Above forecast official PMI manufacturing and non-manufacturing data out of China helped lift Chinese and Asian stock markets, but sentiment remained cautious. While China's CSX 300 and South Korea's KOPSI lifted, Japan's Nikkei 225 finished with a 1.5% loss, and Australia's ASX 200 index with 2.4% decline. The S&P 500 mini was showing a 1% decline in overnight trading, pointing to steep opening losses on Wall Street later. A flurry of end-of-month data releases out of Japan. We remain bullish on the yen, anticipating persisting risk aversion in global markets due to renewed Covid restrictions in Europe, uncertainty about another fiscal support package in the U.S. and uncertainty about the upcoming U.S. election. Amid this will come the Brexit endgame, which we see as a wildcard event given the brinkmanship being employed by UK PM Johnson, although we expect the two sides to reach an accord on a future-relationship deal.

    [EUR, USD]
    EUR-USD ebbed to the lower 1.1700s low after earlier printing an eight-day high at 1.1755. EUR-JPY fell back to a low at 123.62 after posting a 12-day peak at 124.26. The declines reflected safe haven demand for the dollar and yen. The first U.S. presidential debate between Trump and Biden ahead of the November elections raised some concerns about the integrity of the elections, and the possibility that it might be contested, which spooked investors. We are bearish on both EUR-USD and EUR-JPY. The ECB policymaker campaign of verbal intervention to at least keep a lid on the euro may well be effective as it is happening as many European nations introduce new restrictions amid surging positive Covid tests. Similar messaging from other central banks, including the BoE and RBA, has also contributed to an overall weakening in the previously strong dollar bearish sentiment that forex market participants had until recently, with the rhetorical interjections countervailing the impact of the Fed's regime shift to a lower-for-longer stance on interest rates. In the U.S., focus remains on Congress and its continued attempts to reach a resolution on another pandemic-era fiscal support package. The approaching election is also firmly on the radar, too, as the net outcome (House, Senate and Presidency) will have major implications for fiscal policy. The risk of a contested election is also a worry for investors. In Europe, positive Covid tests results have, for the most part, have continued to soar. Covid hospitalisations and mortality, while bumping higher over the last week in many countries (fitting the seasonal pattern for respiratory sickness in this part of the world), still remain at basement levels relative to the March/April peak. The ratio between Covid-caused death and flu- and pneumonia-caused death also remains low, again contrasting markedly to the March/April situation. Nonetheless, the trend in most countries in Europe is for tighter restrictions and more localized lockdowns, which should limited upside scope of the euro.

    [USD, JPY]
    USD-JPY ebbed back under 105.50 after pegging a 15-day high at 105.81. Yen crosses also dropped as the yen picked up safe haven demand as global stocks turned lower. The first U.S. presidential debate ahead of the November elections raised some concerns about the integrity of the elections, and the possibility that it might be contested, which spooked investors. Above forecast official PMI manufacturing and non-manufacturing data out of China helped lift Chinese and Asian stock markets, but sentiment remained cautious. While China's CSX 300 and South Korea's KOPSI lifted, Japan's Nikkei 225 finished with a 1.5% loss, and Australia's ASX 200 index with 2.4% decline. The S&P 500 mini was showing a 1% decline in overnight trading, pointing to steep opening losses on Wall Street later. A flurry of end-of-month data releases out of Japan had little impact on the yen, though including above-forecast industrial production and retail sales figures. We remain bullish on the yen, anticipating persisting risk aversion in global markets due to renewed Covid restrictions in Europe, uncertainty about another fiscal support package in the U.S. and uncertainty about the upcoming U.S. election. Amid this will come the Brexit endgame, which we see as a wildcard event, given the brinkmanship being employed by UK PM Johnson, although we expect the two sides to reach accord on a future-relationship deal.

    [GBP, USD]
    The pound has tracked lower today, retracing gains seen on Monday against the dollar, euro and yen. Cable printed a two-day low at 1.2809, extending the correction from Monday's high at 1.2927. Encouraging signs about EU and UK trade negotiations had underpinned sterling earlier in the week. What's clear is the Boris Johnson's political high jinks (introducing proposed legislation that would allow the UK government to unilaterally overwrite parts of the EU Withdrawal Agreement) hasn't thrown a wrench in the negotiating works as had been feared. The controversial Internal Market Bill, which has yet to pass in the House of Lords, would only become relevant in a no-deal scenario. What remains unclear is how extensive a deal the two sides may come up with, assuming that the no-deal risk is now much reduced. There is potential for the pound to rally on any fresh signs of the two sides coming to an accordance. But, even with a trade deal in place, the UK will leave the EU's single market at year end and experience a drop in its terms of trade. A deal, unless a broad an comprehensive one (which most pundits think unlikely), won't come near to replicating the terms the UK has currently, and the country will lose much of the benefit from the 40 trade agreements the EU has with global economies. While the UK has already struck a deal with Japan, it will likely take years to match/improve on the terms of trade afforded by the EU's single market. Another consideration is the increasing level of restrictions in the UK in response to the surge in positive Covid tests. Localised lockdowns now affect 17 mln people in the UK. Europe is in a similar state. There is also a potentially self-fulfilling mechanism at play, with exchange rate weakness causing spikes in input prices in the UK, as highlighted by the prelim September PMI surveys, which linked them to both the pound's weakness and downsizing employment numbers. This matters given the high import component of UK exports. Overall, while there is scope for nearer-term rebounds, we retain a bearish medium- to longer-term view of the pound.

    [USD, CHF]
    EUR-CHF has lifted above 1.0800 again. The SNB last week 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.

    [USD, CAD]
    USD-CAD edged fractionally above recent highs in posting a near two-month high at 1.3421. The Canadian dollar and other commodity-correlating currencies, are likely to remain on declining path given the uncertainties about the U.S. election and fiscal policy, and new Covid restrictions in Europe. Oil prices plummeted yesterday, by nearly 5%, as a consequence of this backdrop. We remain bullish on USD-CAD.

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