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By XE Market Analysis October 8, 2020 7:02 am
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    XE Market Analysis: North America - Oct 08, 2020

    The dollar recouped lost ground against most peer currencies. EUR-USD settled to near net unchanged levels near 1.1750 after ebbing back from a 1.1781 high, which was set in early London trading. Dollar weakness had been a driver earlier. More dovish remarks have come from ECB policymakers, who have recently let it be known their concern about the recent rise in the euro's effective exchange rate, given its tightening impact on real interest rates at a time when new Covid restrictions are crimping economic activity. Cable fell back to the lower 1.2900s after earlier printing a two-day peak at 1.2971. There has been brinkmanship between the EU and UK, with the EU's chief negotiator Barnier yesterday telling ambassadors he doesn't expect the UK to walk away from negotiations without a deal, eliciting a response from Boris Johnson that Britain will indeed walk on October 15th if a satisfactory deal isn't struck. A Bloomberg article published earlier today, cited EU sources saying that a deal is likely despite the tensions. Dovish remarks came from BoE Governor Bailey, who said that "we are by no means out of ammunition," and that the central bank will use policy actively and aggressively if needed, referencing the economic threat posed by Covid and associated restrictions. USD-CAD posted a 17-day low at 1.3235, weighed on by a combo of U.S. dollar weakness and a 1.5% rise in oil prices. USD-JPY plied a narrow range just below yesterday's three-week high at 106.12. The Kiwi dollar was little impacted by RBNZ Assistant Governor Hawkesby saying that the central bank is "actively" laying the groundwork for negative interest rates. New positive Covid tests outcomes continue to shoot up in Europe, but the rate of serious illness (as measured by ICU admissions) and mortality rates remain at low levels, although bumping up in many countries, as indeed are the same metrics for other respiratory disease in the usual seasonal pattern. Tentatively, there is little sign as yet that another big wave impact on public health, as witnessed in March and April in Europe, is unfolding. But most governments are nervous and remain firmly set on pursing virus-suppression-until-vaccine strategies.

    [EUR, USD]
    EUR-USD settled to near net unchanged levels near 1.1750 after ebbing back from a 1.1781 high, which was set in early London trading. Dollar weakness had been a driver earlier, and the currency has seen recouped lost ground. Uncertainties prevail about next month's U.S. election, and the risk that it will be contested, about the Brexit endgame, and, increasingly, about new Covid restrictions and lockdowns in North America and, more especially, Europe. More dovish remarks have come from ECB policymakers, who have recently let it be known their concern about the recent rise in the euro's effective exchange rate, given its tightening impact on real interest rates at a time when new Covid restrictions are crimping economic activity. ECB's Schnabel also warned about credit cycle risks further down the track, especially when support measures are withdrawal, which could equally be applied to the UK, the U.S. and many other economies given the large debt levels that have been built up over the last decade. Overall, there are no strong directional bias at play in EUR-USD at the current juncture. New positive Covid tests outcomes continue to shoot up in Europe, but the rate of serious illness (as measured by ICU admissions) and mortality rates remain at low levels, although bumping up in many countries, as indeed are the same metrics for other respiratory disease in the usual seasonal pattern. Tentatively, there is little sign as yet that another big wave impact on public health, as witnessed in March and April in Europe, is happening. But most governments are nervous and firmly set on pursing virus-suppression-until-vaccine strategies. Northern states in the U.S., as in Canada, are also seeking spikes in positive Covid tests, which is also leading to the implementation new restrictions. Weekly jobless claims data and Fed speakers will feature later in the U.S.

    [USD, JPY]
    USD-JPY plied a narrow range just below yesterday's three-week high at 106.12. 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]
    Cable printed a two-day peak at 1.2971, and the pound also posted modest gains versus the yen, and more modestly so against the euro. There has been brinkmanship between the EU and UK, with the EU's chief negotiator Barnier telling ambassadors he doesn't expect the UK to walk, eliciting a response from Boris Johnson that Britain will indeed walk on October 15th if a satisfactory deal isn't struck. A Bloomberg article, citing EU sources, suggests that a deal is likely, which seems to account for the pound's bid, with markets overlooking dovish remarks by BoE's Bailey. The central bank governor said that "we are by no means out of ammunition," and that the central bank will use policy actively and aggressively if needed, referencing the economic threat posed by Covid and associated restrictions. Regarding Brexit, the consensus expectation is for a limited tariff free, quota free deal, which we concur with. The impact of a no-deal departure from the EU would have, and in particular the impact it would have on the UK's financial services industry -- the golden goose of the UK tax revenue office -- gives Brussels a powerful negotiating hand. There is now one-week to go until the EU's summit. Fishing rights and level playing field rules, of which state aid rules, are the principal obstacles. France is the main objector to UK demands on fishing, but is under pressure from other EU nations to make concessions. A recent BBC article reported that EU diplomats are hoping that "guiding principles" in place of strict adherence to level playing field rules may be the route to compromise on that front. It should be considered that Boris is under a lot of pressure from hardline Brexit ideologues in his party, whose influence is strong, having been the driving force behind the controversial Internal Market Bill. This means that a no-deal exit from the single market cannot be entirely ruled out.

    [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 17-day low at 1.3235, weighed on by a combo of U.S. dollar weakness and a 1% rise in oil prices. 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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