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By XE Market Analysis November 5, 2020 8:09 am
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    XE Market Analysis: North America - Nov 05, 2020

    The dollar and yen have declined with coursing risk appetite in global markets driving gains in other currencies and asset markets. U.S. Treasury yields have remained in decline, narrowing the yield spread versus the Bund, gilt and JGB yields, among others. Markets are essentially discounting a Biden presidency and a split Congress. Although Democrats still have a narrow path to taking control of the Senate (there is a 48 versus 48 deadlock currently, with four seats left to be decided), most political pundits think it unlikely. At the same time Biden is the favourite to win the presidency, although there is still some way to go before vote counting will be complete and Trump still has narrow path to win. Trump is also mounting legal challenges. The general view is that Biden will reach the 270 winning electoral college vote threshold (he's currently at 264 to Trump's 214), and that Trump's litigation efforts will come to naught. Without the Senate, the Democrats big fiscal stimulus plans will be kept in check. This means both a reduced prospect for bond issuance and a reduced prospect for inflation, which is why Treasuries have been rallying strongly. The yield on the 10-year T-note has plunged by nearly 20 bp from the high seen just ahead of Tuesday's election. The combo of lower yields, loose labour market conditions, the prospect of less competition for resources from the government, excitement about tech and the growing fad for WFH (work from home) stocks, and prospects for a Covid vaccine are among the factors underpinning Wall Street. The S&P 500 closed with a 2.2% gain yesterday, and S&P 500 E-mini futures were up 1.8%, as of the early London afternoon. The risk-on theme has imparted a downside bias on the dollar and yen. The DXY dollar index fell to a nine-day low at 92.84. EUR-USD rallied back above 1.1800, extending the solid rebound from yesterday's low at 1.1603. A nine-day high was logged at 1.1819. USD-JPY ebbed to a low at 104.00, despite yen softness against other currencies. The dollar bloc and other commodity-correlating currencies have been outperforming. The pound has gained moderately versus the euro, and more so versus the dollar and yen. The BoE surprised to the upside by expanding the QE total by 150 bln -- 50 bln more than expected -- while leaving the repo rate unchanged at 0.1%, as had been widely expected.

    [EUR, USD]
    EUR-USD has rallied back above 1.1800, extending the solid rebound from yesterday's low at 1.1603. The high so far, as of the late London morning, is 1.1815, which is a nine-day peak. A combo of broad euro gains and broad dollar softness has been at play. The pair is back to showing a net gain from month-ago levels, which speaks of the lack of bigger-picture directional bias. Bearish euro factors, including the relatively high level of Covid-related restrictions in Europe versus the U.S. and the ECB's signalling of stepped up monetary stimulus and its distaste for a higher exchange rate, have been countervailed by the steep drop in U.S. versus Bund yield differentials over the last couple of days. The prospect of a split Congress with a Biden presidency (assuming Trump's litigation efforts come to nothing) has seen markets price out a Democrat clean sweep scenario, which translates as a reduced prospect for big fiscal stimulus and less bond issuance, which has seen Treasury yields drop sharply over the last couple of days.

    [USD, JPY]
    The yen has gained moderately on the dollar today, but has lost ground to most other currencies. The prevailing risk-on theme in global markets has weighed on the yen, as per the usual correlative pattern. 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, gives the yen its low-beta haven currency profile.

    [GBP, USD]
    The pound is up on the dollar and moderately up on the euro after some whippy price action in the wake of the BoE announcement. The BoE expanded gilt purchases by by 150 bln pounds -- 50 bln more than markets had been anticipating. Despite this, gilt yields have risen, with the differential over Bunds widening a little. Markets welcomed the BoE's more aggressive than anticipated increase in stimulus, which has helped feed the prevailing risk-on theme in global markets. The rise in sterling has seen shares of large cap, export oriented UK underperform European peers, while shares of smaller cap, domestically oriented UK companies have performed strongly. Cable, assisted by a generally softer dollar, rallied by over 0.6% in posting a high at 1.3075, while EUR-GBP dove some 60 pips to a 0.9006 low in the wake of the BoE announcement before settling higher, around the 0.9040-50 area. The BoE left the repo rate unchanged at 0.1%, as had been widely expected, while signalling it is ready to expand asset purchases again, if necessary. The BoE stressed that the outlook remains "unusually uncertain," dependent on the evolution of the pandemic and measures taken to protect public health, alongside the nature of, and transition to, the UK's new trading relations with the EU. The BoE expects GDP to lift in the first quarter of 2021 on the proviso that Covid restrictions loosen and that there is a free trade agreement with the EU in place on January 1, which is when the country exits from the common market and customs union. The central banks sees inflation lifting in the new year as the impacts of a sales tax cut and energy price declines dissipate. On the Brexit front, EU negotiator Barnier raised eyebrows yesterday by stating that "very serious divergences remain." Judging by the performance of the pound, markets are evidently not perturbed, expecting a last minute climbdown. The final deadline is understood to be the end of next week.

    [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 remained heavy but above the two-week low that was see yesterday at 1.3093. The pair saw some relatively extreme price action yesterday in surging by over 2 big figures from the aforementioned low to a 1.3299 peak only to turn sharply lower again. Despite the risk-on backdrop, we currently take a neutral view of USD-CAD. While the U.S. dollar has been softening, oil prices are likely to remain heavy, overall, given the demand destruction for oil amid tight Covid restrictions in Europe and some parts of North America. Reopening of oil facilities in the Gulf of Mexico following the passing of a hurricane is another factor. WTI benchmark crude prices at prevailing levels around $38.50, while up by over 14% from the recent low, they remain down by nearly 8% from the highs that were seen a couple of weeks ago, before the likes of German and France announced they were heading back into lockdowns.

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