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By XE Market Analysis November 13, 2020 7:19 am
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    XE Market Analysis: North America - Nov 13, 2020

    A risk-back-on theme emerged during the London morning, which imparted a concurrent dollar and yen softening theme in currency markets while seeing commodity currencies lift out of lows. The main European stock indices has racked up gains of over 0.5%, as of the late London morning, and S&P 500 E-mini futures were up by nearly 1%, almost reversing the closing decline the cash version of the index saw on Wall Street yesterday. The UK's FTSE index was the exception due to an outperformance in the pound. The departure of the UK government's director of communications, and news that Dominic Cummings will leave his advisory role to prime minister by Christmas, can be read as a weakening in the influence of the 'Vote Leave' campaigners, meaning this could herald a softer, more pragmatic attitude to Brexit, although it is not yet clear what shape the new administration set-up will take. Cable posted a high at 1.3187, which recouped nearly two thirds of yesterday's decline, while EUR-GBP dropped to levels under 0.8970, correcting form yesterday's high at 0.9006. EUR-USD remained in a narrow range in the lower 1.1800s, unmoved by another raft of dovish signalling from ECB policymakers. USD-JPY dipped to a three-day low at 104.86, while the yen softened against most currencies during the London morning after firming during Tokyo trading. USD-CAD dropped back to the lower 1.3100s after posting an eight-day high at 1.3170, inversely tracking oil prices which rallied out of intraday declines. Market narratives have been loaded with the 'fading Covod-19 vaccine rally' phraseology due the rollout logistics and time frame. The IEA said that a Covid vaccine won't likely boost the oil market until late 2021, for instance. Pfizer's production of a workable vaccine, with a high efficacy rate, has given investors the ability to see across the valley of restrictions and lockdowns in major economies, but the valley appears to be a wide one. Any successful candidate vaccine at this stage will also come with long-term efficacy and population-wide safety unknowns. But, the global economy is in overall better shapte than earlier in the year, with nations leaning to live and work with Covid. It's worth highlighting that the all-cause excess mortality rate is remaining nearly in-line with seasonal norms, even in hard-hit Europe, contrasting the picture being thrown up by the Covid-specific mortality rate. The explanation, at least in Europe, is that Covid is replacing other causes of death, rather that increasing excess deaths (as it did earlier in the year), with other causes showing a marked decrease in expected mortality rates.

    [EUR, USD]
    EUR-USD has settled in the lower 1.1800s. In posting a low at 1.1745 earlier in the week, the pair completed a more-than 50% retrace of the outsized gain the pair saw last week through to Monday. We retain a bullish long-term view on the pairing, which is underpinned by a bearish long-term view on the dollar, though this hinges on risk appetite holding up in global markets. The dollar's real effective exchange rate (as calculated by the BIS) remains at historically rich levels, and we expect broad declines in the U.S. currency over the longer term as investors seek higher yield value and growth opportunities around the world. The Fed's inflation-tolerant lower-for-longer policy rubric, and negative real interest rates in the U.S., are also considerations. As for the euro, the prevailing predicament of Covid-related restrictions and the impact on growth and ECB policy are, of course, not too conducive to a high-conviction bullish view of EUR-USD, and accordingly this restrains our view about EUR-USD upside possibilities. This could change as and when signs appear that the Covid crisis will be overcome. The recent first joint EU offering of social bonds, which will finance a jobs program, both attracted foreign capital and shored up the reputation of the euro, and there are more issues to come.

    [USD, JPY]
    USD-JPY dipped to a three-day low at 104.86, weighed on by gains in the Japanese currency amid a backdrop of softening stock markets. Yen crosses have remained heavy, and AUD-JPY, a recent outperformer, posted a fresh correction low. Market narratives are loaded with the 'fading Covod-19 vaccine rally' phraseology due the rollout logistics and time frame. The IEA said that a Covid vaccine won't likely boost the oil market until late 2021, for instance. Pfizer's production of a workable vaccine, with a high efficacy rate, has given investors the ability to see across the valley of restrictions and lockdowns in major economies, but the valley appears to be a wide one. 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 was showing a 0.5% gain on the dollar as of the late London morning, and the UK currency was also making gains versus the euro, yen and other currencies. Several factors appear to be at play. One is the rebound in equity markets, which, if being view as a revival of the Covid vaccine rally, is a positive for the pound, with the UK having large pre-orders of the Pfizer candidate vaccine. The main European stock indices are racking up gains of over 0.5% and S&P 500 E-mini futures are up by nearly 1%, nearly reversing all of the closing loss that the cash version of the index saw on Wall Street yesterday. The UK saw the biggest peak to trough drop in its GDP this year out of the G20 economies, so it may benefit most in the route out of the crisis. Another consideration is the political developments on Downing Street, with the departure of the government's director of communications, and news that Dominic Cummings will leave his advisory role by Christmas, being read as a weakening in the influence of the 'Vote Leave' campaigners, meaning there could be a softer, more pragmatic attitude to Brexit, although it is not yet clear what shape the new administration set-up will take. As for the ongoing negotiations, there is still no breakthrough with only about a week to go to the 'final final' deadline. Evidently, given the pound's performance, the prevailing market expectation remains that there will be a last minute climbdown and the two sides will strike a deal, which is what we anticipate. Both sides will have to make concessions if a deal is to be achieved. All things Brexit go down to the wire, and neither side has been willing, as yet, to make the first move in the concession game. Too much is at stake for both sides, surely, for there to be a failure in statesmanship. It should also be clear that the UK government has the option of exiting the common market in close alignment to EU rules and then diverging in an evolving process over time. The promise of future divergence would serve to mollify the powerful faction of Brexit ideologues. There is also the possibility of there being a 'technical delay', though the political mood seems set against this. UK media, meanwhile, have been increasingly highlighting the likely disruptive impacts to cross border trade that are likely to be seen when the UK leaves the single market and customs union in just seven weeks time.

    [USD, CHF]
    EUR-CHF rallied this week from sub-1.0700 levels to levels above 1.0800. Coursing risk-on positioning weighed on the Swiss franc with investors factoring in a sea change in optimism about a vaccine solution to Covid-19. 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 lifted for a fourth consecutive day, posting an eight-day high at 1.3170. Oil prices fell by over another 1.5% in the WTI benchmark market, and are down by over 6% from high seen earlier in the week, which weighed on the oil correlating currencies. The IEA said that oil demand will fall more than it previously envisioned, and that a Covid vaccine won't likely boost the oil market until late 2021. Despite this, we expect further downside in USD-CAD, given the level of stimulus in the works around the world, increased ability to live with and work around the Covid virus (the lockdowns in Europe being much less restrictive than before, and the second dip in the expected double dip recession is likely to be much shallower than the first time around). The all-cause excess death rate is also remaining within seasonal norms in Europe, which markedly contrasts the picture when Covid-19 first struck.

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