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By XE Market Analysis November 25, 2020 7:34 am
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    XE Market Analysis: North America - Nov 25, 2020

    The dollar and yen firmed up and the dollar bloc and other cyclical currencies turned lower as stock markets in Europe drifted lower after a mixed session across Asian markets. Commodities also came off the boil, with copper prices, for instance, turning negative on the day after posting a near seven-year high. Oil prices also pared gains after the WIT benchmark posted a near nine-month peak. ECB's Mersch said that he was not in favour of cutting the deposit rate further, which some narratives attributed to the re-emergence of caution, along with down-to-the-wire anxieties on the EU-UK trade negotiation front. The DXY dollar index rebounded back to near net unchanged levels around 92.20 after earlier posting a 12-week low at 91.95. EUR-USD concurrently corrected back under 1.1900 after earlier posting a 12-week high at 1.1929. Market participants are likely to have been mindful that the pair has consistently failed to sustain gains above the 1.1900 level for almost four months now. USD-JPY remained rooted in the mid 104.00s, with the yen itself find a degree of safe haven support against other currencies. The Japanese currency rebounded from two-week lows in the case against both the euro and Australian dollar. AUD-USD retreated by nearly 50 pips from the 12-week peak that was seen at 0.7373 during Sydney trading. USD-CAD lifted back above 1.3000 after earlier posting a 15-day low at 1.2988. The pound and the Australian dollar were the joint weakest of the main currencies on the day.

    [EUR, USD]
    EUR-USD posted a 12-week high at 1.1929 before correcting quite briskly back below the 1.1900 level. Market participants will be mindful that the pair has consistently failed to sustain gains above the 1.1900 level for almost four months now. The run higher was driven broad euro firmness, while the drop back was partly down to a pick up in demand for dollars, which has been concomitant with the risk-on theme having come off the boil, with stock markets turning lower in Europe after a mixed performance in Asia. EUR-CHF's rally to a 12-week high at 1.0872 has been symbolic of the broader support for the common currency (building on recent gains associated with the recent sharp improvement of risk appetite, which has weighed on the franc and floated the cross from sub-1.0700 levels). The euro is also showing gains against the dollar bloc currencies, which are correcting after recent strong gains. There is, however, no compelling reason to be affirmatively euro bullish from the prevailing perspective. Eurozone nations are under Covid restrictions, which are likely to remain in place throughout the winter. The 750 bln euro EU recovery fund has been vetoed by Poland and Hungary due to a dispute about the rules, although there seems good prospects for a compromise to be reached. The ECB continues to signal a strong dovish policy bias, and its current financial stability report warns about the sharp rise in corporate and sovereign indebtedness and the risk of withdrawing fiscal support in economies damaged by Covid containing restrictions. In the bigger picture, we still anticipate the euro gaining versus the dollar and yen while underperforming against more cyclical currencies on the view that risk appetite is likely to hold up in the months ahead, given optimism for a vaccine-facilitated return to economic normality in 2021, or something approaching it, massive liquidity from world central banks, low inflation etc.

    [USD, JPY]
    USD-JPY plied a sub 30-pip range near 104.50. The yen posted fresh lows against some other currencies, including a two-week low against both the euro and Australian dollar, before rebounding. 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. 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 derive from 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 traded softer today after a mixed performance yesterday. Taking a step back, the pound is showing moderate gains from week-ago levels, and an average gain of over 2% against the dollar, euro and yen from month-ago levels, reflecting the confidence in the forex market that a no deal Brexit endgame will be avoided. The EU and UK negotiating teams have been continuing discussions by video conference. The deadline for reaching agreement, the latest in a series of deadlines that have come and gone, is reportedly now next Tuesday (December 1). Heads of state are now fully engaged. Overlooking the ensuing down-to-the-wire theatre, we fully expect that win-win will prevail, with both sides evidently striving to a avoid no-deal by accident, even if it means some kind of fudged extension. JPMorgan analysts are less confident, but still give 80/20 odds for a deal, up from 66% odds for a deal they previously envisioned. France is the main 'bad cop' protagonist on the EU side, along with Spain to a lesser extent, which has a special interest about Gibraltar, threatening on numerous occasions to veto any deal if it doesn't get what it wants on fishing rights. France has bad cop form on Brexit, having consistently threatened to veto the multiple extensions in the previous negotiation over the UK withdrawal agreement, only to back down with equal consistency (the withdrawal agreement became effected on February 1 this year). President Macron has political incentive to put up a strong show over fishing rights, given the north of France around Boulogne -- a major fishing port situated on the Channel -- will be an important base for him in the 2022 presidential election. But many EU states, including Germany, think that the UK's position on fishing, wanting quotas to UK waters to be negotiated annually (similar to Norway), is not unreasonable. In sum, France is unlikely to want to lose EU political good will by vetoing now. From the Brussels perspective, the pressure Macron has been exerting on the UK has been useful, although apparently unsuccessful as the UK hasn't blinked. The most likely outcome is a narrow trade deal, though there is a chance for a more pragmatic broader deal to begin with given the Covid crisis, subject to change in an evolving process in the years ahead. Pragmatism and realpolitik may prevail. A leaked Whitehall document warns of "perfect storm" chaos in the event of a no deal in the Covid-19 era.

    [USD, CHF]
    EUR-CHF has rallied to three-month highs above 1.0850, extending recent gains from sub-1.0700 levels. Recent risk-on positioning has been weighing on the Swiss franc with investors factoring in a sea change in optimism about a vaccine solution to the Covid-19 crisis. This will be pleasing to policymakers at the SNB, given it chronic disquietude about the franc's value. 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]
    The Canadian dollar posted a fresh high against the U.S. dollar, which pit USD-CAD at a 15-day low at 1.2988. The pair subsequently lifted back above 1.3000. WTI benchmark oil prices rose today to the highest level since early March, gaining on the combo of risk-on sentiment and discipline from OPEC+ nations in maintaining output quotas. Barclays is forecasting crude prices to reach $50 in 2021, which is a view we concur with. The OPEC+ group 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 consumers of gasoline to reduce commuting days during times of oil high prices. These are motivating 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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