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By XE Market Analysis December 31, 2020 7:16 am
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    XE Market Analysis: North America - Dec 31, 2020

    The DXY dollar index has posted another major-trend low, at 89.52, a level last traded in April 2018. The dollar has continued to correlate inversely with global stock market direction, with weakness today being concomitant with the MSCI Asia Pacific rising to a new record high in holiday-thinned conditions. The DJIA yesterday closed at a fresh record on Wall Street. European markets declined, however, while oil and other commodities have remained directionally subdued. EUR-USD remained buoyant on dollar weakness, although remained just off from yesterday's near-33-month peak. USD-JPY remained heavy, though above yesterday's two-week low at 102.96. Both the Australian and New Zealand dollars, which are living up to expectations for being outperformers in the post-Covid recovery trade, rallied to fresh 32-month highs against the U.S. dollar. USD-CAD edged out a 13-day low at 1.2728. The lack of directionin oil prices over that last 10 days or so has rendered the Canadian dollar the underperformer of the dollar bloc pack. Oil prices re-entered pre-Covid crisis ranges in recent weeks, while a combination of increasing OPEC and non-OPEC supply, swelled global inventories, and demand-sapping Covid lockdowns and restrictions across many major economic areas in the northern hemisphere, have taken the legs out of the bull trend. Elsewhere, Bitcoin rallied to yet another record peak. Crypto currencies look likely see much more upside amid signs that long-term institutional investment managers have been buying and holding bitcoin and other leading crypto currencies as an inflationary hedge. Assets held by Grayscale Investments, the world's biggest crypto asset manager, is widely cited as a bellwether indicator of this, as it allows professional investors exposure to crypto currencies without having to store the assets. Grayscale reported yesterday that it had $19 bln in crypto assets under management, up from $16.4 bln last week.

    [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 posted a fresh 31-month high versus the dollar at 1.3653, and while flattered by dollar softness, the currency concurrently posted a six-day high against the euro. In contrast, the UK has continued to underperform relative to the in-favour Australian and New Zealand dollars. On the year, the pound ranks as the joint weakest of the main currencies, alongside the U.S. and Canadian dollars. We are moderately bullish on the pound from here. While the UK terms of trade with the EU will erode from midnight today, when the Trade and Cooperation Agreement comes into effect, replacing the Common Markets and Customs Union, Brexit uncertainty has finally come to an end, which will unleash a process of business adaptation and pent-up investment. Aside from the deal with the EU, the UK has now signed up to 62 trading agreements around the world. The latest addition was a deal with Turkey, which was finalised this week. 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. With regard to the UK's key financial sector, which was 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. Longer term, the UK government is aiming to re-position financial services as a global hub for green and tech financing. There is also a view that the UK currency will potentially be an outperformer in the 2021 recovery trade, which hinges on successful vaccination programs bringing an end to the lockdown era, as the UK economy underperformed G20 peers during the 2020 lockdowns and restrictions. UK equities are cheap compared with global peers, especially U.S. stocks.

    [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]
    USD-CAD edged out a 13-day low at 1.2728. The lack of directionin oil prices over that last 10 days or so has rendered the Canadian dollar the underperformer of the dollar bloc pack. Oil prices re-entered pre-Covid crisis ranges in recent weeks, while a combination of increasing OPEC and non-OPEC supply, swelled global inventories, and demand-sapping Covid lockdowns and restrictions across many major economic areas in the northern hemisphere, have taken the legs out of the bull trend.

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