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By XE Market Analysis November 24, 2020 12:02 pm
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    XE Market Analysis: North America - Nov 24, 2020

    The dollar and yen came under pressure as risk-on positioning re-established. Pound outperformance was another theme. The MSCI Asia-Pacific ex-Japan stock index hit a new record high. Europe's Stoxx 600 pared early gains, leaving last week's eight-month highs unchallenged, but remained remaining buoyant. S&P 500 E-mini futures were showing a 0.5% gain as of the late London morning. There have been various positive news, ranging from Covid vaccines and treatments, to encouraging corporate earnings and economic data, and from the Brexit front, which have collectively helped investors look beyond the prevailing surge in Covid positive tests results across the northern hemisphere. The U.S. government said vaccinations could start mid December for those most at risk and health workers, while UK authorities may approve the Pfizer vaccine this week and start distribution as soon as December 1. AstraZeneca reported a 70% efficacy of its candidate vaccine, which rose to 95% to those receiving a second half shot of the vaccine. The U.S. FDA also approved Regeneron for use as a treatment (President Trump was treated with this). Above-forecast economic data came in from South Korea (exports), Singapore (GDP) and New Zealand (retail sales), and while both UK and Eurozone preliminary November PMI reports dropped to sub-50.0 readings, signalling a recession-bound direction, the decline was notably less worse than had bee expected. As for Brexit, there are reports of a deal being struck by mid this week, the BBC's European correspondent Katya Adler, for instance, reporting that "the general expectation is that a deal will be done in the next few days," while a source cited by Sky reported that a deal is "95% agreed." It has also become clear that officials are determined not to let the fishing rights issue, which is the principal obstacle (much more so than level playing field rules and governance issues), prevent a deal from being reached. Sterling rallied. Cable posted a two-and-a-half-month high at 1.3380. Elsewhere, the DXY dollar index posted a 12-week low at 92.04. EUR-USD lifted to a two-week high at 1.1905. USD-JPY traded a narrow range in the upper 103.0s. NZD-USD posted a 23-month high, and AUD-USD saw a five-day high. USD-CAD drifted lower, but remained with its Friday range. WTI oil prices hit a 12-week high.

    [EUR, USD]
    EUR-USD lifted to a high of 1.1894 before upside momentum stalled, leaving yesterday's two-week high at 1.1905 unchallenged. The above-forecast November PMI data out of the U.S. yesterday provided a reminder of the U.S. GDP growth advantage relative European economies, although with Covid containment measures are tightening in many parts of the U.S., this is now being eroded. The November German Ifo business climate index came in above expectations but still marked the weakest reading since July, while Q3 German GDP was unexpectedly revised higher, but is too backward looking to have much relevance given the reality of new Covid restrictions across the eurozone. The data, along with dovish signalling from ECB policymakers and the dispute over the rules around EU recovery fund is also an issue, makes it hard to call for an upside break in EUR-USD, at least in the near term. The pair has consistently failed to sustain gains above the 1.1900 level for almost four months now. November U.S. consumer confidence data, due later, is expected to rise to a 104.0 reading after dipping to 100.9 in October. U.S. confidence readings have been remarkable this year for holding firm relative to prior recessions. U.S. house price data are also expected to show perkiness. Further out, we are bearish on the dollar, which we anticipate to be the driver of a rise to levels around 1.2500, though this hinges on there being sustained risk-on positioning in global markets.

    [USD, JPY]
    USD-JPY has traded moderately softer today, back under the 104.50 level after the pair lifted to a nine-day high at 104.65 yesterday. The above-forecast November PMI data out of the U.S. yesterday provided a reminder of the U.S. GDP growth advantage relative to Japan, and European economies, although with Covid countermeasures tightening in many parts of the U.S., this is now being eroded. The real interest rate differential between the U.S. and Japan is also a mathematical negative for the nominal dollar vs yen exchange rate. Both currencies are still be viewed as safe havens, too, which limits the scope of USD-JPY directional change. Outside the case against the dollar, the yen has been softening, especially against the cyclical currencies, including the dollar bloc. EUR-JPY ascended to one-week high territory, while AUD-JPY and NZD-JPY lifted into respective 12-day and 10-month high terrain. BoJ Governor Kuroda pledged more stimulus today, dependent on there being increased economic impact from Covid countermeasures. The yen's broader performance should continue to hinge on risk appetite in global markets. 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 steadied today after being yesterday's biggest gainer out of the main currecies, despite a 50-pip-plus drop in Cable. Dollar gains had driven Cable lower following strong U.S. data, which highlighted a notable growth advantage of the U.S. economy relative to the UK and European economies. Cable clocked a 13-day high at 1.3399 Taking a step back, the pound is showing an average gain of about 1% against the dollar, euro and yen from week-ago levels, and of just over 2% from month-ago levels, reflecting the confidence in current market that a no deal Brexit endgame will be avoided. Of note, the UK's preliminary November services and manufacturing data produced a much less severe drop in the composite reading than had been expected, though still signalled a contraction in economic activity. PM Johnson expected to announced an exit from lockdown restrictions in early December, to be replaced with a regional tiered system of restrictions, the net impact of which should be to lift economic activity back up. The UK economy is also widely been seen as a likely relative winner from the increased level of optimism for a vaccine-assisted route back to normality in 2021. The government has pre-ordered large quantities of all three of the candidate vaccines that have recently reported strong efficacy. The UK saw a bigger peak-to-trough GDP contraction than any other G20 nation in 2020 as a consequence of the national and global countermeasures taken to tackle Covid-19, and the logic is the reverse will be seen on the way out.

    [USD, CHF]
    EUR-CHF has established a consolidation range around the 1.0800 level after recently rallying from sub-1.0700 levels. Recent 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 has posted a two-week low at 1.3010, with the Canadian currency once again tracking oil prices. WTI benchmark oil prices hit a three-month high at $43.59. Barclays is forecasting crude prices to reach $50 in 2021, which is a view we concur with. The OPEC+ group is maintaining supply discipline, and will decide on extending prevailing quota restrictions next Tuesday (December 1). A three month extension from January has been priced in, while the group is also considering a six-month extension, which by its own analysis would likely swing the oil market back into supply deficit. While global stockpiles are high, demand for oil is set to be well below normal through the northern hemisphere winter due to Covid countermeasures, which are already tight in Europe and becoming more restrictive across North America and in the more northerly Asian countries. There is also a view that after the Covid pandemic has gone, oil will have a more elastic characteristic, with many developed nations likely to see a much higher prevalence of working from home than before, reducing demand for fuel and enabling gasoline consumers to reduce commuting days during times of oil high prices. These are reasons for oil producing nations to keep supply restrained. Assuming quota discipline is maintained, the outlook is bullish for oil on the back of the increased optimism for a vaccine-assisted route out of the prevailing Covid situation. 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 earlier in November, and which was the lowest level the pair has seen since October 2018.

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