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By XE Market Analysis October 1, 2020 7:23 am
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    XE Market Analysis: North America - Oct 01, 2020

    The dollar and yen weakened against most currencies, with sterling being the main exception as the UK currency took a sharp rotation lower on Brexit related developments. Cable dove by nearly over 0.6% to a 1.2821 low, while EUR-GBP rallied by nearly 1%. Weighing were reports that the EU and UK are struggling on key issues in trade talks, along with with the European Commission president von de Leyen announcing that the EU has taken the first step in a legal infringement procedure against the UK in relation to the controversial Internal Market Bill. The UK's final September manufacturing PMI was also downwardly revised to 54.1, a two-month low, from 54.3. EUR-USD, meanwhile, posted a nine-day high at 1.1758. EUR-JPY gained, too. USD-JPY plied a narrow range around 105.50, while EUR-JPY lifted above 124.00 and AUD-JPY rallied by over 0.5% in printing a 10-day high at 75.94. Most other yen crosses also rose. USD-CAD ebbed to a 10-day low at 1.3277, extending the correction from yesterday's two-month high at 1.3421. Hopes about U.S. fiscal stimulus and Covid vaccine have helped lift investor spirits, though concerns remain about the risk for the upcoming U.S. being contested, the possibility of a messy Brexit endgame, and an increased level of Covid restrictions across Europe. Data out of Asia today focused on the Japan manufacturing PMI and Tankan surveys, which both suggested an improvement in sentiment, although the PMI headline, at 47.7, shows that the manufacturing sector remains in contraction. Note that Chinese and South Korean markets were closed, while a systems glitch on the Tokyo Stock Exchange disrupted regional equity trading.

    [EUR, USD]
    EUR-USD printed a nine-day high at 1.1758. EUR-JPY gained, too, with both the dollar and yen having softened amid a backdrop of mostly higher global stock markets. EUR-GBP also rallied by nearly 1%, with the cross floated by a quite steep decline in sterling on reports that the EU and UK are struggling on key issues in trade negotiations, and with the European Commission president von de Leyen announcing that the EU has taken the first step in a legal infringement procedure against the UK in relation to the controversial Internal Market Bill. Despite prevailing strength in the common currency, we are wary of the euro. The EU recovery fund is likely to be delayed just as nearly all European countries ratcheting up Covid restrictions. And this comes amid the ECB campaign of verbal intervention to keep a lid on the euro. Similar messaging from other central banks, including the BoE and RBA, has also contributed to an overall weakening in the strongly bearish dollar bias that forex market participants had until recently. The rhetorical interjections countervail the impact of the Fed's regime shift to a lower-for-longer stance on interest rates. In Europe, positive Covid tests results have continued to soar in most countries. Covid hospitalisations and mortality, while bumping higher over the last week in many countries, still remain at basement levels relative to the March/April peak. The ratio between Covid-caused death and flu- and pneumonia-caused death also remains low, again contrasting markedly to the March/April situation. Nonetheless, the trend in most countries in Europe is for tighter restrictions and more localized lockdowns, which should limit upside scope of the euro.

    [USD, JPY]
    USD-JPY plied a narrow range around 105.50, while EUR-JPY lifted above 124.00 and AUD-JPY rallied by over 0.5% in printing a 10-day high at 75.94. Most other yen crosses also rose, reflecting risk-on positioning theme in global markets, to which the Japanese currency is apt to weaken in such circumstances. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the yen has an established profile of a low-beta haven currency.

    [GBP, USD]
    The pound has taken a sharp rotation lower on Brexit related developments. Cable dove by nearly over 0.6% to a 1.2821 low, while EUR-GBP rallied by nearly 1%. Weighing were reports that the EU and UK are struggling on key issues in trade talks, along with with the European Commission president von de Leyen announcing that the EU has taken the first step in a legal infringement procedure against the UK in relation to the controversial Internal Market Bill. The UK's final September manufacturing PMI was also downwardly revised to 54.1, a two-month low, from 54.3. According to EU sources cited by Reuters, the state aid issue is the major obstacle in future relationship negotiations between the EU and UK, while the EU's final consent would require the controversial Internal Market Bill be withdrawn. Regarding the state aid issue, Robert Peston, a well regarded ITV political journalist, argued in a recent opinion piece that the real reason Johnson's government appeared to be sacrificing the prospect of a trade deal boils down to the desire to subsidise British industry -- to "have the discretion to invest without fetter in hi-tech, digital, artificial intelligence and the full gamut of the so-called fourth industrial revolution." The Brussels position is that the UK can only have a trade deal if it adheres to the EU's state aid regime, or at the least follow very similar rules, which constrains governments from subsidizing industry to prevent unfair competition. The proposed Internal Market Bill, legislation that will unilaterally unpick parts of the Withdrawal Agreement, is specifically designed to enhance the UK's state aid autonomy. This fits the Singapore model that has been must touted by hardline Brexiteers supporters during the Brexit debate, though PM Johnson has been calling for a 'Canada plus' deal, which would be similar to the EU-Canada trade deal that permits 98% of trade in manufactured goods to be tariff free, but extended to include services. The UK government said last month that it will not finalise the details of its post-Brexit state aid regime until next year, which elicited an angry response from Brussels. As things stand, it's hard to see that the EU and UK will be able to come up with anything other than a narrow trade deal by the deadline (being the EU's summit this month on the 15th to 16th).

    [USD, CHF]
    EUR-CHF has lifted above 1.0800 again. The SNB last week repeated, after its quarterly monetary policy review, that the franc remains "highly valued" and said the bank is ready to "intervene more strongly in the foreign exchange market". The cross has repeatedly failed to sustain gains above 1.0800 over the last couple of months. The influence of the SNB's intervening hand may have been at play during the recent upside bursts. Total Swiss sight deposits of francs have risen sharply since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. EUR-CHF still remains below the seven-month peak that was seen in early June at 1.0921.

    [USD, CAD]
    USD-CAD ebbed to a 10-day low at 1.3277, extending the correction from yesterday's two-month high at 1.3421. An outbreak in risk appetite, which has boosted global stock markets and commodity prices, has both seen the dollar weaken while support the Canadian dollar. Oil prices retraced most of the near 5% plummet that was seen on Tuesday.

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