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By XE Market Analysis December 30, 2020 6:45 am
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    XE Market Analysis: North America - Dec 30, 2020

    The DXY dollar index posted a new 32-month low at 89.68, while EUR-USD concurrently printed a 32-month high at 1.2295. USD-JPY saw a nine-day low, at 103.12. The pair's near-10-month low, seen on December 17th, is at 102.88. The Australian and New Zealand dollars posted respective 30- and 32-month highs against their U.S. peer. AUD-JPY and NZD-JPY also saw new trend highs. The Canadian dollar also traded firmer, but remains comfortably below recent trend highs. Oil prices remain in a consolidation, below recent near-nine-month highs. Base metal prices also remain off recent trend highs. Global stock markets have remained buoyant. Despite the seasonal thinnish of markets, investors appear to be chomping at the bit to partake in the 2021 reflation trade. The pound rallied, with Cable posted a nine-day high at 1.3596. The pair's 31-month high, which was seen before Christmas, is at 1.3626. EUR-GBP concurrently ebbed to a two-day low at 0.9029. Market participants are continuing to take stock of the EU-UK trade deal, along with the 62 other deals that the UK have signed globally, the latest being a trade deal with Turkey, which was signed-off on yesterday.

    [EUR, USD]
    We are bullish on EUR-USD into 2021, on the proviso that global asset markets remain in a bull trend, which looks likely amid the mix of fiscal stimulus, prospects for a vaccine-assisted return toward societal and economic normalcy, an anticipated release of pent-up consumer demand in major economies, low interest rates, and so forth. In this scenario, the asymmetry between richly valued U.S. stock markets versus comparatively lower priced markets in Europe and across the emerging world would propel net dollar-weakening capital flows. The Fed's inflation tolerant policy rubric, which should keep U.S. real interest rates on a loosening path, is also a key dollar-negative consideration. The two Georgia run-off elections on January 5th presents some market risk, as the outcome will decide whether the Republicans of Democrats will control the Senate. Democrats need to win both to level the Senate at 50-50, with control swinging to the Democrats due to the tiebreaker vote of Vice President-elect Kamala Harris. For currency markets, a Democratic presidency and a split House -- the most likely scenario -- is seen as bearish for the dollar, while a Democratic presidency and House is seen as dollar bullish, or at least less dollar bearish (due to greater demand-side stimulus, driven by healthcare and infrastructure spending).

    [USD, JPY]
    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 has more than reversed declines seen over the last couple of days, with Cable lifting to a six-day high at 1.3596. The pair's 31-month high, which was seen before Christmas, is at 1.3626. The pound is showing a mixed performance from month-ago levels, showing net gains versus the dollar and euro, but also marked declines against the dollar bloc and other cyclical currencies. There is a view that the UK currency will potentially be an outperformer in the 2021 reflation trade, on the presumption that this does indeed continue to unfold. Brexit uncertainty has finally come to an end, while the UK economy, having underperformed G20 peers during the 2020 era of locked down/restricted economies, is primed to outperform amid the vaccine- and stimulus-assisted return toward economic normalcy in global economies. UK equities are cheap compared with global peers, especially U.S. stocks. There is reason for caution, given the UK economy will abruptly be seeing its overall terms of trade erode with the EU as of midnight on Friday, when the UK leaves the common market and customs union, and life begins under "Trade and Cooperation Agreement" (which is set, later today, be ratified by the UK parliament, and operate on a provisional basis across the Channel until the EU parliament does likewise in January). It should be noted that the real effective pound exchange rate is trading at low levels by historical standards, which reflects the combination of the Brexit impact alongside the outsized impact that domestic and global Covid restrictions has had on the UK economy. We are moderately bullish on the pound from here. Aside from the deal with the EU, the UK has now signed up to 62 trading agreements around the world, the latest addition being a deal with Turkey, which was finalised yesterday. Deals with Albania, Cameroon and Ghana are also in the pipeline, and, further out, a deal with the U.S. is to be expected. Most of the deals so far are continuity agreements, which replicate terms that existed under EU agreements, and will be open to expansion over time. As for the UK's key financial sector, which is not included in the Trade and Cooperation Agreement, this should be largely protected over the near- to median-term under the EU's equivalency regime that governs participation of foreign financial entities in the common market, given that financial centres on continental Europe lack the critical mass to compete with London in many areas. European and UK regulators have already indicated that equivalency agreements will be rolled over in January to prevent major changes. The UK government is aiming to re-position financial services as a global hub for green and tech financing.

    [USD, CHF]
    EUR-CHF has been re-established back above 1.0800, influenced by recent gains in EUR-USD and with risk-on positioning having been weighing on the Swiss franc with investors factoring in a sea change in optimism about a vaccine solution to the Covid-19 crisis. The recent weakening of the currency will have been 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 repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

    [USD, CAD]
    The Canadian dollar has traded firmer today, but remains comfortably below recent trend highs. Oil prices remain in a consolidation, below recent near-nine-month highs. Base metal prices also remain off recent trend highs. While the 2021 reflation trade is likely to recommence with earnest in January, which should lift the Canadian currency, there are oil market fundamentals to consider. OPEC supply is also set to increase in January, on top of the recovering supply out of Libya, while, outside OPEC, Norwegian and U.S. supply are also increasing, with recent price gains making production in the later viable again. There are also expectations for Iran to strike a deal on its nuclear program with the incoming Biden administration, which could lower sanctions that have been stifling oil exports out of the country. In the mix are signs that OPEC dissent is increasing, as highlighted by a recent Chatham House report, with multiple participants in the output quotas looking less likely to remain in compliance.

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