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By XE Market Analysis November 18, 2020 7:25 am
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    XE Market Analysis: North America - Nov 18, 2020

    The dollar continued to soften. While there has been evident caution after recent strong gains in world stock markets, markets have remained buoyant, with Europe's Stoxx 600 lifting towards yesterday's eight-month, S&P 500 E-mini futures gaining 0.3%. Asian markets were mostly higher, though Japan's Nikkei closed lower and Chinese markets were flat. Australia's ASX index scaled to a new eight-month peak. Commodities also rallied, particularly metals, with aluminium prices, for instance, extending recent solid gains in posting the highest levels seen since late 2018. The gains in commodities are both a negative for the dollar and a positive for the dollar bloc currencies. A key factor influencing metal prices has been recent data from China showing its economy is in stronger than recently anticipated shape. Disrupted copper supply out of Peru, which is the world's number two copper producer, along with the launch of an international copper contract in China, are other factors with regard to metals. Oil prices have also been buoyant, with WTI benchmark prices drawing nearer to last week's eight-month high. The OPEC+ group's musings about extending the prevailing restricted output quotas out to next March, and possibly June, with the aim of swinging the oil market back into deficit (supply deficit) by mid 2021, has been supportive of oil prices. The potent mix of low interest rates for the foreseeable future, quantitative easing, fiscal stimulus and the prospect for more, spare capacity (which maintains low costs), and the vision of a return to normalcy in 2021, suggests there is more to come from the rally in cyclical assets. This in turn could be negative for the dollar. Among currencies today, the DXY dollar index posted a nine-day low at 92.22, while EUR-USD lifted to an intraday high at 1.1894, which by our data is 1 pip shy of yesterday's nine-day high. USD-JPY racked up a fifth consecutive down day in posting an eight-day low at 103.80. Cable posted a one-week high at 1.3295, drawing in on the 10-week high seen last Wednesday is at 1.3310. AUD-USD lifted to a high at 0.7329, NZD-USD hit a 20-month high, while USD-CAD dropped to a six-day low at 1.3055.

    [EUR, USD]
    EUR-USD lifted to an intraday high at 1.1894, which by our data is 1 pip shy of yesterday's nine-day high. 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 delayed 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 should 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 is modestly firmer, with Cable posting a one-week high at 1.3295 and drawing in on the 10-week high seen last Wednesday is at 1.3310. EUR-GBP edged out a six-day low at 0.8939. The pound also posted a six-day high versus the Australian dollar. Sterling still remains lower against most of the other main currencies from week-ago levels, and is firmer from month-ago levels. On the year to date, the UK currency continues to register as the weakest of the main currencies due to UK having witnessed the biggest peak-to-trough GDP drop this year out of the G20 economies, alongside Brexit related uncertainties. The Brexit endgame drama is now reaching a climax. There is a lot of noise coming from officials and politicians, yet little response in the pound, with participants uncommitted, waiting on concrete developments. 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." Reuters reported that EU states will be updated on progress on Friday morning. Tensions are running high, as was always going to be the case at this critical juncture. Media sources are highlighting that France of Spain let it be known (again) that they could veto a deal agreed between Brussels and London, which yesterday elicited a terse reply from a spokesperson for PM Johnson asserting that the UK would "thrive" without a deal -- all very much par for the course in EU versus UK banter. We expect that win-win will prevail rather than lose-lose, and that an accord will be reached, and one potentially broader than is currently being anticipated in markets (Johnson has the pragmatic option of leaving the single market in close alignment with EU rules while pledging to Brexit ideologues in his party that the UK will diverge from EU rules over time). This would spark a rally in the pound should it materialise.

    [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 dropped to a six-day low at 1.3055. Buoyant oil prices have given the Canadian dollar an underpinning. Front-month WTI crude futures lifted to a one-week high at $42.26, drawing back in on last week's eight-month high at $43.06. The OPEC+ group is considering extending the prevailing level of output quotas for three months (out to next March), and a six-month extension is also a possibility, with the aim of supporting oil prices over a sustained period of relatively low demand as a consequence of Covid-19 related restrictions around the world. The group estimates that a six-month extension would swing the oil market back into deficit (i.e. a supply deficit) in 2021. Add in the increased optimism for a vaccine-assisted route out of the prevailing Covid situation, this sets oil up for a sustained rally. USD-CAD has been trending lower since March, and we anticipate there is more to come. The current trend low is at 1.2928, which was seen last week, and which was the lowest level the pair has seen since October 2018.

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