Home > XE Currency Blog > XE Market Analysis: North America - Oct 02, 2020

AD

XE Currency Blog

Topics7508 Posts7553
By XE Market Analysis October 2, 2020 7:24 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5432
    XE Market Analysis: North America - Oct 02, 2020

    The yen and pound outperformed other currencies, the former finding safe haven demand amid pronounced risk-off positioning theme in global markets on news that President Trump, along with the First Lady and White House public relations counsellor, have tested positive for Covid, and the latter finding support from Brexit news. Global equity markets and most commodity prices tumbled, while prime sovereign bonds rallied with Trump's health an added item on a growing worry list. With the U.S. president is now self-isolating, at the least his pre-election campaigning will be greatly curtailed. CDC data showis a 94.6% survival rate for people over 70, though presumably this is better for people in their early-to-mid 70s, like Trump, as the data will be skewed by people over 80, who are at greater risk. USD-JPY dove by over 0.5% in pegging a low at 104.94. EUR-JPY fell to a four-day low and the high beta AUD-JPY cross plummeted by over 1% to two-day lows under 75.00. EUR-USD remained heavy after posting a two-day low at 1.1694, having ebbed back from a rebound high at 1.1738. The flash September estimate of Eurozone CPI fell to -0.3% y/y in the headline reading from -0.2% y/y in August, while core CPI fell to 0.2% y/y from 0.4% y/y. A cut in German sales tax, the strong euro (which is up by an averaged 5.3% y/y against the dollar, sterling and yen) and low oil prices (down nearly 30% y/y) account for negative headline print, which has been well flagged by the ECB. Given subdued demand and rising trend of economically disruptive Covid-suppressing restrictions across Europe, we anticipate further euro declines. As for the pound, the currency rallied against all of the other main currencies, bar the yen, though remained off recent highs. News that the EU and UK will continue trade talks through to the EU summit on October 15th (according to Reuters), gave sterling a boost.

    [EUR, USD]
    EUR-USD has remained heavy after posting a two-day low at 1.1694, having ebbed back from a rebound high at 1.1738. EUR-JPY, meanwhile, has dropped quite sharply as the yen proved to be a more favoured safe haven than the dollar following news of President Trump testing positive for Covid. The flash September estimate of Eurozone CPI fell to -0.3% y/y in the headline reading from -0.2% y/y in August, while core CPI fell to 0.2% y/y from 0.4% y/y. A cut in German sales tax, the strong euro (which is up by an averaged 5.3% y/y against the dollar, sterling and yen) and low oil prices (down nearly 30% y/y) account for negative headline print, which has been well flagged by the ECB. Given subdued demand and rising trend of economically disruptive Covid-suppressing restrictions across Europe, ECB policymakers will be focused on warding off the risk of deflationary expectations taking root. Expect more verbal interventions aimed at weakening the euro alongside a progression to a policy regime shift to symmetric inflation targeting, similar to the what the Fed has already codified. This backdrop countervails what had until recently been a strong bearish dollar bias, curtailing upside potential of EUR-USD. Across the pond, the U.S. September payrolls report is up today. We anticipate a continued rebound with employees returning to work (+900k headline expected), but there will still be a net drop in employment for 2020 overall. Political negotiations on a new fiscal relief package in the U.S. remain ongoing. The mood music has improved somewhat, with some Republicans eager to strike a deal with the Democrats before the November-3 elections. Overall, we remain bearish on EUR-USD.

    [USD, JPY]
    The yen has rallied versus other currencies amid a pronounced risk-off positioning theme in global markets on news that President Trump, along with the First Lady and White House public relations counsellor, have tested positive for Covid. S&P 500 E-minis were down about 1.%, as of the late London morning, while Asian and European equity markets dove. USD-JPY dove by over 0.5% in pegging a low at 104.94. EUR-JPY fell to a four-day low and the high beta AUD-JPY cross plummeted by over 1% to two-day lows under 75.00. Trump's health is an added item on a growing worry list. With Trump is now self-isolating, and at the least his pre-election campaigning will be greatly curtailed. CDC data showis a 94.6% survival rate for people over 70, though presumably this is better for people in their early-to-mid 70s, like Trump, as the data will be skewed by people over 80, who are at greater risk. In Japan, August unemployment came in at 3.0%, matching expectations and having no impact on markets with the gaze of participants focused on Trump's health and what implications it may have on the upcoming election, along with the ongoing political negotiations on a new fiscal relief package in the U.S. (some Republicans are eager to strike a deal with the Democrats before the November-3 elections), and the worsening Covid situation in Europe, which is causing more restrictions. Also in the U.S., the September payrolls report is up today. 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 continues to be buffeted by Brexit related headlines. The latest is that EU and UK trade talks will to go on through to the EU summit on October 15th, according to Reuters, citing sources. This week's round of discussions, which were the last scheduled, failed to resolve all the issues. The article didn't state which issues remain unresolved, but it's no secret that they are fishing rights and state aid. The London Times, meanwhile, citing a UK source, reported that a call between UK Prime Minister Johnson and European Commission President von de Leyen, scheduled for tomorrow, is aimed at persuading the EU to get "the tunnel." As of the late London morning, the pound was up against all the main currencies, with the exception of the yen, which was underpinned by safe haven demand as stock markets tumbled. Cable posted a high at 1.2953. Yesterday's high at 1.2980 has thus far been left untroubled. The pound has traded mixed over the last week, gaining on the dollar and yen, while showing little net change against the euro and declines against the Australian dollar. Yesterday the currency saw high volatility on confusing Brexit headlines. In the mix was 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 UK government's controversial Internal Market Bill. This should be viewed as a sideshow, with talks on the future relationship continuing. We expect that the two sides will come to an accord. The incentives for a deal far outgun the political and economic risks in a no-deal scenario, especially on the UK's side of the Channel. Like all things Brexit, the issue will likely go down to the wire, which is effectively the upcoming EU summit on October 15th-16th, before the UK's actual exit from the common market at year end.

    [USD, CHF]
    EUR-CHF has ebbed back under 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, even though 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 has remained buoyant after earlier matching yesterday's peat at 1.3329. The pair is likely to remain bias to the upside, assuming the risk appetite remains weak, given Trump's Covid condition and rising Covid cases in Canada and Europe, which is leading to economically disruptive counter measures in the form of restrictions (on social gathering, travel etc) and localized lockdowns.

    Paste link in email or IM