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By XE Market Analysis November 3, 2020 7:06 am
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    XE Market Analysis: North America - Nov 03, 2020

    The correction in the dollar and yen intensified as market participants made a quick retreat from risk-off positioning. The risk-sensitive AUD-USD and AUD-JPY have been the biggest gainers out of the most traded currencies, with both showing gains of comfortably over 1% at their highs. Wrong-footed speculative accounts beat a retreat from short positions in assets and high beta currencies. Even stock markets in locked-down Europe rallied strongly, with many national bellwether indices showing gains of over 2% while the broad pan-Europe Stoxx 600 of about 1.5%. Most commodity prices showed solid gains, rebounding from recent weakness. Oil prices have surged by nearly 14% from yesterday's five-month low. In currencies, the commodity correlating ones, alongside many currencies of newly developed and developing world economies, are rallying (the Indian rupee and Turkish lira are notable exceptions), while the haven currencies are down, principally the dollar and yen. The European currencies as a bloc are also up on the dollar and yen. EUR-USD rallied above 1.1700, extending the rebound from yesterday's five-week low at 1.1623. USD-CAD has extended a sharp retreat from the one-month high that was seen yesterday at 1.3370. The pair has posted an eight-day low at 1.3117 -- a near 1.9% loss from the high. The break out from risk-off positioning has been caused by a combination of factors. The dawn of U.S. election day itself seems to have been a catalyst, as it poses event risk: the possibility of it being contested, but also the possibility that it goes smoothly, with final polling signalling the chance of a Democrat sweep. This has complemented other factors. Strong economic data out of China (the October Caixin PMI showed the biggest improvement in business conditions since January 2011) is one. Another is a near concrete sign that the EU and UK are heading to an accord on trade, with Brussels conceding that the UK could see its fishing quotas double. It has also been observed some market narratives that investors may have reason to "look across the valley" of the current Covid predicament and the prospect of a bleak winter in Europe. Much of Asia and other parts of the world, including the U.S., have remained open for business at levels that are much greater than Europe currently, while it has also been recognized that the lockdowns in Europe are no where near as restrictive as they were the first time around.

    [EUR, USD]
    EUR-USD recovered above 1.1650 after pegging a five-day low at 1.1624. France and Germany are now in one-month lockdowns, and many other Eurozone and European nations are now operating under much tighter restrictions. Europe is now heading back into economic recession, although this shouldn't be as deep as before given the level of restrictions are less overall much less severe than they were before, and with much of the rest of the world's economies remaining open. The asymmetry of experience between Europe and the rest of the world, especially Asia, should nonetheless pitch the euro and other European currencies on a weakening path against the dollar and yen, although this outlook may hinge in part on how the U.S. election pans out. The U.S. election is up tomorrow. Polls point to a Democratic sweep, but there was a large polling error in 2016 and the possibility for the same is there again assuming so-called shy Trump voters (who don't declare their true intention to pollsters) outnumbering shy Biden voters. It could be argued that a strong Democrat win (Presidency, House and Senate) would be dollar positive given this scenario would open the fiscal stimulus floodgates. But the dollar is looking fundamentally vulnerable, even though the currency has been functioning as a safe haven during recent phases of heightened of risk-off positioning. There isn't sufficient domestic saving in the U.S. to fund sharply rising federal deficits, and this would be exacerbated under a Democrat-controlled Congress and Presidency. This comes against the backdrop of negative yields in the U.S. and competition for funds from expanding budget deficits across the globe. The Fed's lower-for-longer monetary policy, which tolerates higher inflation, also raises the scope for a further decline in real interest rates in the U.S. The dollar is already likely in a long-term downtrend.

    [USD, JPY]
    USD-JPY declined below Monday's nadir in making a low at 104.47. 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]
    Sterling s been trading steady-to-moderately-firmer. Cable lifted above Monday's high in making 1.2946, despite England heading into a one-month lockdown from this Thursday, which could be extended according to senior cabinet minister Gove. Wales and Northern Ireland are already in lockdowns, and the Scottish government is imposing tighter restrictions. Taking a step back, the pound is mixed relatively to peer currencies from month-ago levels. An unexpected upward revision in the UK's final October manufacturing PMI (in data released yesterday) isn't too noteworthy as the revision was modest and with the data backward looking given fast changing realities, with the UK and the rest of Europe now heading back into lockdown-induced economic recessions, albeit ones that shouldn't be as deep as seen earlier in the year. The asymmetry of experience between Europe and the rest of the world, especially Asia, should nonetheless pitch the European currencies on a weakening path against other currencies. The BoE's Monetary Policy Committee meets this week (announcing Thursday) and is expected to expand its asset purchase program by 100 bln pounds. Given prevailing developments, the possibility of the BoE taking the repo interest rate negative is also up, and the central bank should at the least raise the emphasis of negative rates as being a policy option rather than just a contingency plan. On the Brexit front, the EU and UK negotiating teams remain in talks. The general expectation remains that a deal will be struck by mid month. Brussels conceded that the UK could see its fishing quotas double, which is the strongest sign yet that the two sides are on track to reach an accord on trade, with fishing rights having been a principal sticking point. French Europe minister Beaune said in a BBC interview on Sunday that "we would like a deal" to preserve France's fishing access to UK waters.

    [USD, CHF]
    EUR-CHF has lifted back above 1.0700 after foraying below this level following recent declines in the euro, with the ECB levelling-up monetary accommodation. The ECB's policy course has been in effect supplementing the Swiss currency's chronic firming bias by weakening the euro, with the EUR-CHF cross being a proxy of the franc's trade-weighted exchange rate. The franc has a fundamental underpinning rooted in Switzerland's strong balance of payments position, which features a large current account surplus to GDP. Switzerland also has the status of having the second highest GDP per capita in the world. While the SNB implements a punishing -0.75% deposit rate, real interest rates are still lower in the U.S. than they are in Switzerland, which is mathematically bearish for the nominal USD-CHF exchange rate, all else equal -- and albeit very modest. 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 extended a sharp retreat from the one-month high that was seen yesterday at 1.3370. The pair has posted an eight-day low at 1.3117 -- a near 1.9% loss from the high, which is a pretty large move by the standards of the prevailing era. A sharp recovery in oil prices drove the move, which evidently wrong footed speculative accounts with Canadian dollar short exposures, who had accumulated both in USD-CAD and CAD-JPY. Front-month WTI crude prices have surged by nearly 13% from yesterday's low, which in turn drove the Canadian dollar and other oil-correlating currencies higher in a classic short-squeeze dynamic. The idling of oil facilities in the Gulf of Mexico by Hurricane Zeta catalysed a rebound in the crude market. Strong economic data out of China (the October Caixin PMI showed the biggest improvement in business conditions since January 2011) added fuel to the rebound. For perspective, oil prices still remain down by nearly 10% from the highs seen just a couple of weeks ago, before European nations started ramping up Covid-related restrictions, which have culminated with Germany, France and the UK implementing national lockdowns. Much of Asia and other parts of the world, including the U.S. to a degree, have remained open for business at levels that are much greater than Europe currently, while it has also been recognized that the lockdowns in Europe are no where near as restrictive as they were the first time around. This was the background to the recovery in crude prices.

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