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By XE Market Analysis October 6, 2020 7:59 am
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    XE Market Analysis: North America - Oct 06, 2020

    The dollar rebounded after earlier softening, concomitantly with an uncertain tone establishing across European stock markets and with U.S. index futures having reversed earlier gains. The pan-Europe STOXX 600 index was near net unchanged as of the early afternoon session. While President Trump's return to the White House was greeted positively, uncertainties prevail: about the next fiscal pandemic relief package in the U.S., about next month's U.S. election, about the Brexit endgame, and, increasingly, about new Covid-suppressing restrictions and lockdowns in North America and Europe. EUR-USD ebbed back to near net unchanged levels around the 1.1780 mark after earlier edging out a fresh 15-day high at 1.1802. Cable's drop was more pronounced with the pound finding itself back in the underperforming lane. The pair dropped to a 1.2919 low, which reversed most of yesterday's ascent, after earlier pegging a near three-week high at 1.3007. EUR-USD lifted by nearly 0.5% in making a high at 0.9117. Both an above-forecast UK September construction PMI and forecast-beating August German manufacturing orders were overlooked, while dovish signalling from ECB policymakers seemed to have some downside impact on EUR-USD. Elsewhere, USD-JPY in a narrow range in the mid-to-upper 105.00s. USD-CAD posted a 15-day low at 1.3241, which extends the correction from the two-month high that was seen last week at 1.3421. A 9%-odd rally in oil prices from Friday's lows has helped underpin the Canadian dollar. The Australian dollar saw some chop, rising before settling lower. The RBA left policy unchanged as had been mostly expected. This left both the cash rate and targeted yield on the 3-year bond unchanged at 0.25%. Governor Lowe's statement said that "both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment." The call for more fiscal stimulus, along with an acknowledgement that the decline in growth has not been as bad as expected, gave the Aussie dollar a lift, though it didn't sustain. AUD-USD spiked to a high at 0.7208 before ebbing to a 0.7145 low. The November ASX 30-day interbank cash rate futures closed in Sydney at 99.915, indicating a 73% expectation for the RBA to cut the official cash rate by 25 bp to 0.00% at the board meeting on November 3.

    [EUR, USD]
    EUR-USD edged out a fresh 15-day high at 1.1802. The pair remains buoyant, though there is limited upside impulse currently, which is concomitant with stock markets in Europe and U.S. index futures flagging somewhat. Uncertainties prevail: about the next fiscal pandemic relief package in the U.S., about next month's U.S. election, about the Brexit endgame, and, increasingly, about New Covid restrictions and lockdowns in North America and Europe. The scene is set for volatile markets in the coming weeks. We are bearish on the dollar, bigger picture, but the timing doesn't look right to act on this now, and might not be for some time. The weaker dollar hypothesis is structured on Fed policy alongside a net outflow of speculative and non-speculative capital, and requires a backdrop of positive risk appetite in global markets to function, to draw out capital parked in the safe haven of U.S. Treasuries and seek growth in global economies. It follows that the world needs to make it through the Covid crisis, either via vaccines, or by countries learning to live with the new pathogen in a manner that causes minimal curtailment of economic activity. Sweden provides a positive example in how this might be done, and Belgium recently bucked the trend in Europe by easing restrictions; but most governments in the northern hemisphere are nervous heading into the winter respiratory illness season. The Brexit endgame, even assuming it finishes with a deal, is likely to put a dent in the terms of trade positions in both the EU and UK, and more especially in the case of the latter. This, and the Covid situation in Europe, will maintain the ECB's accommodative bias and references to recent strength in the euro's effective exchange rate, given its tightening effect on real interest rates in the Eurozone. For now, this should limit EUR-USD's upside potential.

    [USD, JPY]
    USD-JPY in a narrow range in the mid-to-upper 105.00s while most yen crosses have seen some buoyancy amid an rebound in risk appetite in global markets after U.S. President Trump returned to his White House residence and with the Democrats and Republicans showing signs of progressing another fiscal support package. 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 came under pressure against both the dollar and euro during the London morning. EU-UK trade talks have been extended through to the EU summit, which starts on October 15th. Prime Minister Johnson and European Commission President von de Leyen spoke via video call on Saturday. Both maintained encouraging mood music, though Johnson said that while he wants a deal, he could live without one, while von de Leyen said that significant gaps remain on key issues. We think Johnson's no-deal threat is bluff. The next couple of weeks will be the most intensive phase yet in negotiations -- and decisive with state leaders now fully engaged and given the fast-approaching deadline. Goldman Sachs analysts are calling for a "thin" tariff free, quota free deal, which seems to be the consensus, and we are inclined to agree. The net impact on both the EU and UK terms of trade will be negative, but much more so in the UK's case. On the Covid front, local lockdowns are intensifying in the UK and Europe. We take a bearish medium- to longer-term view of the pound's effective exchange rate. In data, the UK's final September composite PMI beat expectations at 56.5, well up on the preliminary estimate of 55.6, though dropping back from the August's six-year high reading of 59.1. A strong upward revision to the services PMI (to 56.1 from 55.1) more than offset a small downward revision to the manufacturing PMI (to 54.1 from 54.3). Overall, the survey showed that private sector activity is still expanding robustly, but waning notably from the pace of expansion seen in August. Optimism in the dominant services sector for the 12 months ahead fell to its lowest since May, while the volume of new business fell to its lowest since June. Respondents noted concerns that the strong post-lockdown recovery in consumer demand had peaked. Employment numbers continued to decrease, especially in the service sector, mostly due to slumping demand but also due to rising input costs, which were linked to weakness in the pound. Concerns about Covid and Brexit, and uncertainties about the global economic outlook, featured high in survey responses. Given the new restrictions and sharply rising level of localised lockdowns in the UK and across Europe, we should expect a further moderation in the pace of economic expansion.

    [USD, CHF]
    EUR-CHF has ebbed back under 1.0800 again, reflecting the chronic proclivity for the Swiss currency to rise in nominal terms, from incoming interest and other investment receipts from assets held abroad, alongside the trade surplus. A higher franc drives down inflation, which to a degree offsets any loss in export competitiveness that a nominally firmer currency might otherwise entail, as there is a high import component in Swiss exports. The SNB, however, remains committed to limiting gains in the franc. At its quarterly monetary policy review last month, it stated that the franc remains "highly valued" and said it 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 remains below the seven-month peak that was seen in early June at 1.0921.

    [USD, CAD]
    USD-CAD posted a 15-day low at 1.3241, which extends the correction from the two-month high that was seen last week at 1.3421. A rekindling of investor spirits has given global markets a lift. Oil prices have gained for a second day, with the WTI benchmark now up by over 8% from Friday's low. On Canada's domestic front, rising positive Covid tests are becoming a problem as they are leading to economically disruptive restrictions. We expect the August trade report (up later today) to show a C$2.0 bln deficit from the C$2.5 bln deficit in July. Canada's September employment report (due Friday) has us anticipating a 100.0k headline gain after the 245.8k rise in August, with unemployment seen ebbing to 10.0% from 10.2%.

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