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By XE Market Analysis November 17, 2020 6:53 am
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    XE Market Analysis: North America - Nov 17, 2020

    The dollar and commodity currencies are softer against the yen and European currencies today. The dollar didn't show its usual inverse correlation with stock markets, which came off the boil today after rallying yesterday, driving the MSCI All World index to a record high. The DXY dollar index fell 0.4% in making an eight-day low at 92.31. EUR-USD concurrently posted an eight-day high at 1.1885. USD-JPY has ebbed to a fresh one-week low at 104.24, which is now over a 50% retrace of the strong gains seen last Monday during the initial height of the 'Covid vaccine' risk-on positioning spree. The Australian and New Zealand dollars dropped back after edging out respective eight-day and eight-month highs against the U.S. dollar. The Canadian dollar also edged out a new high, and similarly saw a fall-back-from-highs dynamic. Oil prices were trading at near unchanged levels on the day, as of the late London morning. The pound has posted modest gains today, though is still showing modest losses versus most peer currencies from week-ago levels, and modest gains versus the same currencies from month-ago levels. On the year to date, the UK currency continues to register as the weakest of the main currencies. The Brexit endgame drama is reaching a climax. Neither the EU or UK has blinked yet in trade talks. The UK's trade negotiator Frost said that a a deal could be reached by next Tuesday, while an EU diplomat cited in the Sun tabloid said chiefs are working to avoid and "accidental no deal." Market participants, meanwhile, are refraining from committing, waiting on concrete developments. We expect a deal, and one potentially broader than is currently being anticipated in markets, and anticipate a rally in the pound as and when this becomes apparent.

    [EUR, USD]
    EUR-USD edged out an eight-day high at 1.1875 amid a phase of dollar weakness combined with strength in European currencies. We retain a bullish long-term view on the pairing, which is underpinned by a bearish long-term view on the dollar, which in turn 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 key considerations. As for the euro, the prevailing predicament of Covid-related restrictions and the impact on growth and ECB policy may be not too conducive to a high-conviction bullish view of EUR-USD, and accordingly this restrains our view about EUR-USD upside possibilities, though tighter restrictions are now being imposed in sizeable parts of the U.S., including California. It's shaping up to be a tough winter in the northern hemisphere. The dollar may still decline during this period. Low interest rates and expectations for an extended period of ongoing low rates (which enhances corporate earnings), spare capacity (which maintains low corporate costs), big fiscal and monetary stimulus globally (albeit delated in the U.S.), and confidence in the vaccine escape route out of the Covid crisis in 2021, is a potently bullish mix for stock markets, which in turn would be a dollar negative.

    [USD, JPY]
    USD-JPY has ebbed to a fresh one-week low at 104.24, which is now over a 50% retrace of the strong gains seen last Monday during the initial height of the so-called 'Covid vaccine' global equity market rally. The yen has been steady-to-firmer against other currencies, which in turn reflects a correction in the risk-on positioning theme of yesterday. Most stock markets have come off the boil, although the futures in the stay-at-home replete NASDAQ index have rallied by nearly 0.5%. Japan's Nikkei has recently been an investor favourite in the 'great rotation' into cyclical stocks, with well managed, large cap and export oriented companies in demand. Dividend yields in Japan are about 2.8%, better than to 2.2% return offered by U.S. companies, according to analysts at Schroders, and are near to the 3.0% dividend return found in many emerging markets. While foreign investor demand for Japanese shares is a capital inflow to Japan, these investors may be hedging out the currency exposure given the yen's proclivity for counter-cyclical trending. GDP data out of Japan and industrial production figures out of China yesterday reaffirmed a picture of stronger economic conditions compared to recently prevailing expectations. The mix of low interest rates (which enhances the value of corporate earnings), massive monetary and fiscal stimulus, along with spare capacity (which lowers costs), is a potently bullish tonic for equity markets. This looks like a recipe for a bubble, but there may be considerably more upside to be see yet.

    [GBP, USD]
    The pound has posted modest gains today, though is still showing modest losses versus most peer currencies from week-ago levels, and modest gains versus the same currencies from month-ago levels. On the year to date, the UK currency continues to register as the weakest of the main currencies. The Brexit endgame drama is reaching a climax. Neither the EU or UK has blinked yet in trade talks. The UK's trade negotiator Frost said that a a deal could be reached by next Tuesday, while an EU diplomat cited in the Sun tabloid said chiefs are working to avoid and "accidental no deal." Market participants, meanwhile, are refraining from committing, waiting on concrete developments. We expect a deal, and one potentially broader than is currently being anticipated in markets, and anticipate a rally in the pound as and when this becomes apparent.

    [USD, CHF]
    EUR-CHF rallied 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 edged out a five-day low at 1.3062, though downside momentum abated with global stock markets and oil prices pausing after the strong risk-on positioning theme of yesterday. Oil prices are sharply up on early November lows, but are showing only just over a net 1% gain from month-ago levels, and remain down by over 32% on the year-to-date. Covid restrictions in the U.S., in Europe and elsewhere are keeping a lid on demand for oil, though the increased optimism for a vaccine solution to the pandemic, and massive monetary and fiscal stimulus, should keep cyclical commodities like crude underpinned.

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