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By XE Market Analysis October 7, 2020 7:31 am
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    XE Market Analysis: North America - Oct 07, 2020

    The dollar and yen fell back against most currencies during the European morning, concurrently with a rally in U.S. equity index futures after Trump tweeted that he is ready to sign-off on a support scheme for airlines (totalling $25 bln), wage protection ($135 bln), and a $1,200 stimulus check. This helped offset his abrupt postponement of talks with Democrats on a new pandemic fiscal relief package, though the threat of new nationwide lockdowns in some European countries put a cap on European stock markets. EUR-USD was lifted by dollar weakness, rising back above 1.1750 after earlier whittling out a two-day low at 1.1725. AUD-USD lifted, and more especially AUD-JPY, which rose by over 0.7%. USD-CAD dipped back under 1.3300 after earlier posting a one-week high at 1.3341. The yen underperformed the dollar, which allowed USD-JPY to rally back above 106.00 for the first time since mid September. Sterling was a special case, dropping quite sharply into the New York interbank open after Ireland's foreign minister, Coveney, warned that the UK should not underestimate how strongly the EU feels about fishing rights, which, along with reports that the Brussels was set on calling the UK government's bluff on his no-deal threat, elicited a terse reply from the UK prime minister, Johnson, that "we will take back full control" on January 1. Reports of likely new tighter Covid restrictions in Scotland and northern England were also in the mix. Cable dropped to a five-day low at 1.2849 while EUR-GBP rallied to six-day highs above 0.9150.

    [EUR, USD]
    EUR-USD recovered back above 1.1750 after earlier whittling out a two-day low at 1.1725. The dollar had found safe haven bids after President Trump abruptly called off talks with the Democrats on further fiscal aid until after the election. This catalysed a bout of risk-off positioning, which featured dollar and yen buying in currency markets. Trump subsequently tweeted that he is ready to approve support for airlines (totalling $25 bln), wage protection ($135 bln) and a $1,200 stimulus check, which helped revive spirits in markets to a degree, which saw the dollar lose upside traction and the yen soften. 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 thesis 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, and the trend is for more draconian measures. The Brexit endgame, even assuming it finishes with a deal, is likely to conclude by putting a dent in the terms of trade positions in both the EU and UK. This, and the Covid situation in Europe, should maintain the ECB's accommodative bias. Policymakers at the central bank has been highlighting concern about recent strength in the euro's effective exchange rate, given its tightening effect on real interest rates in the Eurozone. For now, this backdrop should limit EUR-USD's upside potential.

    [USD, JPY]
    USD-JPY recouped from yesterday's low at 105.47 and traded back above 106.00 for the first time since mid September. The low was the product of a brief bout of safe haven buying of the yen after President Trump announced that he was calling off talks with the Democrats for further fiscal aid until after the election. Most yen crosses saw a bigger-magnitude drop, though recovered some lost ground today. Trump subsequently tweeted that he was ready to approve support for airlines (totalling $25 bln), wage protection ($135 bln) and a $1,200 stimulus check, which helped revive risk appetite in global markets. 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 is trading mixed once again relative to peer currencies, gaining on the generally weak dollar and yen while holding steady against the euro and posting moderate losses to the Aussie dollar. Cable has posted a high at 1.2930, up from yesterday's 1.2867 low but remaining well off yesterday's highs just above 1.3000. We remain bearish on the pound, in terms of its effective exchange rate, even in the scenario that the EU and UK strike a trade deal, as this would still result in a deterioration in the UK's trading position. Even with a tariff free, quota free deal, the loss of unfettered access to the single market and customs union will lead to trade destruction. UK exporters will face cost-increasing non-tariff barriers, such as customs formalities and regulatory barriers. The same will be the case for EU exporters to the UK, though the impact will be much magnified on the UK side of the Channel. Productivity will also be impacted, given reduced competition and reduced scope for businesses to benefit from economies of scale. This will be accompanied by less investment. The government will of course will work to offset these impacts with new global deals, and it has signed many continuity agreements to cover for the loss of access to the EU's free trade agreements, but the fact is the UK is set to be jolted into worse trading terms with or without a deal. Financial services -- a golden goose that accounts for 22% government tax receipts -- is a particular concern. A Bloomberg article yesterday highlighted the steady stream of financial services resources that are being moved out of the UK to the Eurozone, and the fact that even with a EU trade deal in place, London will likely continue to lose business to Eurozone financial centres as the "equivalence" regime on rules would leave firms with long-term uncertainty (Brussels would be able to unilaterally decide if the UK's rules are to its satisfaction, while European nations are bent on drawing business away from London over the long term). For the pound, substantial declines are possible, with net trade and investment falling, with the consequence of net outflows of both non-speculative and speculative capital and increased pressure on the BoE to go negative with interest rates.

    [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 dipped back under 1.3300 after earlier posting a one-week high at 1.3341. President Trump's postponement of negotiations on a new fiscal support package caused a bout of risk aversion in global markets, which both supported the U.S. dollar while weighing on the Canadian dollar via a weakening in oil prices. A subsequent improvement in risk appetite (Trump tweeted that he's ready to sign-off on a number of support measures) saw USD-CAD ebb back. On Canada's domestic front, rising positive Covid tests are becoming a problem as they are leading to economically disruptive restrictions. Canada's September employment report is up on Friday, where we anticipate 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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