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By XE Market Analysis December 1, 2020 7:11 am
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    XE Market Analysis: North America - Dec 01, 2020

    The dollar and yen came back under pressure as risk-on positioning in global markets resumed. Most of the main dollar pairings and cross rates remained with recent ranges, though NZD-JPY saw a new one-year high, even as NZD-USD remained just off the 30-month high that was seen yesterday. Cable briefly traded above 1.3400 for the first time since early September before correcting. Europe's Stoxx 600 equity index gained nearly 1%, drawing back in on its nine-month high. The MSCI Asia-Pacific (ex-Japan) equity index rose over 1% after closing out November with a 9% on-the-month gain, which is the best monthly performance in 19 years. Japan's Nikkei posted a new 29-year high. U.S. equity index futures were showing gains of over 1%, as of the late London morning. Base metals gained, though remained off recent trend highs for the most part. The principal catalyst behind the prevailing risk-on theme was China's Caixin manufacturing PMI survey for November, which posted a seventh consecutive month of improvement in rising to 53.9, beating the consensus forecast and rising from 53.6 in the month prior -- and marking its best level in 10 years. In Europe, both the eurozone and UK final November manufacturing PMIs were unexpectedly revised up. Also in the mix was U.S. Treasury Secretary Mnuchin, who called on Congress to repurpose the near $0.5 tln in unused CARES funds. These factors came with Covid vaccine optimism running high, alongside massive liquidity from world central banks, prospects for more fiscal stimulus and a consumer spending spree, with household savings having been accumulating during the pandemic era. There are some reasons for caution, including a nearer-term one of investment funds having depleted cash, another being the risk that vaccination programs don't work as well as currently being envisaged, though the overall mix of factors is potently bullish for stock markets. In other developments, the RBA left its policy rate unchanged at 0.1%, as expected, and said in its statement that both fiscal and monetary stimulus would be needed "for some time." The OPEC+ group has deferred a decision on output quotas until Thursday.

    [EUR, USD]
    EUR-USD has extended a three-month high at 1.1977, floated by dollar weakness. The U.S. currency has come under pressure against metals (copper hitting seven-year highs, aluminium 2-year highs) and Bitcoin and other crypto currencies, has seen a 32-month low against the New Zealand dollar, and a three-month low versus the Australian dollar. There seems real momentum behind the move, and prospects for EUR-USD to break above the 31-month high seen in August at 1.2024 look good. While there doesn't appear many strong prevailing reasons to bullish on the euro (recession bound eurozone nations, strong dovish bias at the ECB, the 750 bln euro EU recovery fund being delayed by a disputed with Poland and Hungary), European stock markets have outperformed global peers notably in November. We have been anticipating the euro gaining versus the dollar and yen while underperforming against more cyclical currencies on the view that risk appetite is likely to hold up in the months ahead, given optimism for a vaccine-facilitated return to economic normality in 2021, or something approaching it, alongside massive liquidity from world central banks, low inflation, and ongoing QE programs that force investors to search for the higher returns to be had in global equity markets. Negative real interest rates in the U.S. and the Fed's codified lower-for-longer policy rubric are considerations, as are the U.S. deficits and capital seeking higher returns in buoyant global markets.

    [USD, JPY]
    USD-JPY ebbed to a four-day low at 103.91. The yen was concurrently steady versus the euro and the pound, but posted respective two- and four-day lows against the Australian and Canadian dollars. A risk-cautious sentiment in global markets was a factor in the dollar bloc softening, while the real interest rate differential between the U.S. and Japan is also a mathematical negative for the nominal dollar vs yen exchange rate. Both the dollar and yen are still being viewed as safe havens, too, which may limit the magnitude of USD-JPY directional change. Outside the case against the dollar, the yen is amid a longer-term softening trend, especially against the cyclical currencies, including the dollar bloc. BoJ Governor Kuroda pledged more stimulus earlier in the week, dependent on there being increased economic impact from Covid countermeasures. The yen's broader performance should continue to derive from the level of risk appetite in global markets. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency.

    [GBP, USD]
    The pound came under pressure after Cable traded above 1.3400 for the first time in three months. A high was left at 1.3406 before the pair dropped quite sharply. The correction low so far is 1.3342. The high was a reflection of broader dollar weakness, while the drop has been a reflection of broader pound weakness. These dynamics come with market participants continuing to wait for a concrete development from the EU and UK future relationship negotiations. Just last week today, December 1, was being touted as the deadline, though now the latest deadline is reportedly this Saturday, while there have been reports that the European parliament could convene as late as December 28 to ratify a trade deal. Germany's Merkel has been putting the pressure on EU states to reach a deal with the UK. Fishing remains a key sticking point, though France's insistence that the current arrangement remains in place, which gives the UK only 18% of the catch from its own waters, is seen as unreasonable by the UK, naturally, but also many other EU states. Pressure on the UK government is intense. Brexit ideologues in PM Johnson's party are demanding that no quarter is given to the EU, while a leaked Whitehall document last week warned of a "perfect storm" of chaos in the event of a no-deal in the Covid-19 era. U.S. president elect Biden warned London that the scope for a deal with the U.S. would be compromised if there is a return of a hard border on Ireland -- which is what could happen in a no deal. What is clear, deal or no deal, is that EU and UK's relationship will be an ever evolving and complicated one when the UK exits its transition membership of the common market and customs union at year end. The UK wants to diverge from EU rules, while EU states are concerned that the UK will undercut their markets. The relationship will be subject to dispute arbitration with the possibility of retributive measures. This is why markets are anticipating only a narrow free trade deal, which would be centred on manufacturing.

    [USD, CHF]
    EUR-CHF rallied to three-month highs above 1.0850, extending recent gains from sub-1.0700 levels. Recent risk-on positioning has been weighing on the Swiss franc with investors factoring in a sea change in optimism about a vaccine solution to the Covid-19 crisis. This will be pleasing to policymakers at the SNB, given their chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank stated at its last quarterly monetary policy review that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market."

    [USD, CAD]
    USD-CAD has dropped back under 1.2950, pulling lower from yesterday's rebound high at 1.3010, which was seen after the pair posted a 26-month low at 1.2922. The oil market will remain the dominant driver of USD-CAD, and we remain bullish of both oil and the Canadian dollar. Oil prices are up today after ebbing moderately over the previous few days. Strong Chinese manufacturing data boosted oil and other resource commodities. The OPEC+ group deferred a decision on output quotas until Thursday. The consensus expectation is for the group to refrain from rising output quotas for at least another three months from January, while a six-month extension is also being considered, which by its own analysis would likely swing the oil market back into supply deficit. Global stockpiles are high and demand for oil is set to be well below normal through the northern hemisphere winter due to Covid countermeasures, which are already tight in Europe and becoming more restrictive across North America and in the more northerly Asian countries. At the same time OPEC output has increased, with Libyan production having fully returned to pre-blockade levels. There is also a view that after the Covid pandemic has gone, oil will have a more elastic characteristic, with many developed nations likely to see a higher prevalence of working from home than before, reducing demand for fuel and enabling consumers of gasoline to reduce commuting days during times of oil high prices. These are motivating reasons for oil producing nations to keep supply restrained. Assuming quota discipline is maintained, the outlook is bullish for oil on the back of the increased optimism for a vaccine-assisted route out of the prevailing Covid situation. Consumers have built up savings and there is potential for a significant acceleration in global economic activity by mid next year. USD-CAD has been trending lower since March, and we anticipate there is more to come.

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