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By XE Market Analysis November 4, 2020 7:38 am
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    XE Market Analysis: North America - Nov 04, 2020

    Choppy price action has been prevailing in currency markets, and global financial markets more broadly, as participants attempt to digest the closer-than-expected elections in the U.S. As things stand, at 07:00 ET, the Democrats have retained the House but don't appear to have more than to a 50-50 chance of flipping the Senate, while Biden is still the favourite to win the Presidency. It may take days to determine the Presidential winner as the closeness of the race in key battleground states requires extensive counting of votes, including record numbers of mailed ballots, which typically take longer to process. There is also a chance that Trump will contest the result should Biden win. Even if Biden wins, he may be the first president in 32 years to take office without full control of Congress should Democrats fail to take the Senate. The DXY dollar index dropped sharply back to a low at 93.54 after earlier surging to a 94.30 high, mirroring price action in S&P 500 E-mini futures, which surged back from sharp declines. EUR-USD has seen similarly volatile price action, dropping sharply from levels in the mid 1.1700s to a 1.1605 low before recouping to the upper 1.1600s. Other dollar pairings saw correspondingly directional whippiness. USD-CAD hit a rebound high at 1.3299, the culmination of a 2 big figure rally from a two-week low at 1.3093, but subsequently dove back to levels under 1.3200, inversely tracking a U-turn higher in oil prices. The Australian and New Zealand dollars underperformed, despite rebounding out of lows. A side theme was pound declines against peer currencies, which reflects the increasing market recognition of the UK currency being vulnerable to the compounding impact of Brexit and Covid-induced lockdowns in the UK and across Europe. Cable managed to rebound above 1.3000 after earlier pegging a low at 1.2915, but the pound remained lower versus the euro, yen and most other currencies.

    [EUR, USD]
    EUR-USD has seen volatile price action, dropping sharply from levels in the mid 1.1700s to a 1.1605 low before recouping to the upper 1.1600s. A closer than expected U.S. election sparked risk-off positioning, which underpinned the dollar, though this theme fizzed out and the dollar, along with European stock markets and U.S. equity index futures, recovered. As things stand, as of 06:30 ET, the Democrats have retained the House and still have a chance at flipping the Senate, though its a very close call, while Biden is still the favourite to win the Presidency. It may take days to determine the Presidential winner as the closeness of the race in key battleground states requires extensive counting of votes, including record numbers of mailed ballots, which typically take longer to process. There is also a chance that Trump will contest the result should Biden win. In Europe, the final October composite PMI reading for the Eurozone was unexpectedly revised up, to 50.0 from 49.4, underpinned by a strong performance in the manufacturing sector, especially in Germany, which has benefited in part from strong export demand out of China. The Eurozone outlook is bleak in the months ahead given lockdown phase number 2, although restrictions aren't as harsh as they were before, while other major global economies, such as China, are maintaining demand for Eurozone exports. EUR-USD faces a period of both downside and upside risks. Longer-term, the risks appear more skewed to the upside on the back of a bearish dollar outlook. There isn't sufficient domestic saving in the U.S. to fund sharply rising federal deficits, which would be exacerbated under the loose fiscal policies in 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.

    [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]
    The pound has been underperforming peer currencies today, that is the euro, dollar, yen and dollar bloc currencies, among some others. The final October UK composite PMI was unexpectedly revised lower to 52.1 in the headline dragged down by weakness in services, and more specifically in the hospitality, transport and leisure sectors due to Covid-related restrictions. The data had little impact on the pound, which had seen its lows ahead of the release, with market participants already anticipating a double-dip recession as a consequence of lockdown number 2, which starts in England tomorrow and will remain in place for a month, subject to review. Cable dropped over 1% to a 1.2915 low, and while rebounding to levels around 1.2970-80 remains down by about 0.4%. EUR-GBP rallied out of two-month lows and back above the 0.9000 level. We have been earmarking sterling as being a currency at particular risk given the upcoming drop in the UK's terms of trade when the country exits the single market and customs union, the impact of which will be compounded by Covid lockdowns in the UK and across Europe. Taking a step back, the pound is mixed relatively to peer currencies from month-ago levels, revealing the market's expectation for the EU and UK to strike at least a narrow trade deal. The EU's Barnier said that 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, although other reports suggest that a concrete breakthrough is yet to materialize. The two sides are reportedly working to a November-15 deadline, which would leave just enough time for the ratification process to be completed before the UK exits the common market and customs union. The BoE's Monetary Policy Committee is meeting, announcing tomorrow, and is expected to expand its asset purchase program by 100 bln pounds. Given the fast changing realities, 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.

    [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 been seeing whippy price action, surging back higher today after dropping sharp over the previous two days. The pair hit a rebound high earlier at 1.3299, which is the culmination of a 2 big figure rally from a two-week low at 1.3093, and subsequently dipped back to levels around 1.3200. The closer than anticipated U.S. election, which could leave the country in political limbo for days on extended vote counting, along with Trump threatening to contest the result should Biden be declared the victor, inspired risk-off positioning in global markets only for this to reverse. Oil prices dropped and then rallied to fresh highs, imparting support back on the Canadian dollar.

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