Home > XE Currency Blog > XE Market Analysis: North America - Oct 09, 2020

AD

XE Currency Blog

Topics7501 Posts7546
By XE Market Analysis October 9, 2020 7:34 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5425
    XE Market Analysis: North America - Oct 09, 2020

    The dollar has tracked lower amid a backdrop of overall buoyant stock markets. EUR-USD posted a three-day high at 1.1803, drawing in on the 18-day high seen on Tuesday at 1.1809. The pair needs to close out today above 1.1718-19 to rack this up as a second consecutive up week. USD-JPY ebbed moderately lower on the influence of broad dollar softness, with the yen trading steady-to-softer against other currencies. AUD-JPY edged out a three-day high, and is near three-week high territory. AUD-USD posted a three-day high at 0.7194. USD-CAD saw a three-week low at 1.3158 while CAD-JPY has hit a 24-day peak. An near 11% rally in oil prices over the last week (although lower today) has been underpinning the Canadian dollar, and other oil-correlating currencies. This comes with risk appetite in global markets holding up, despite the surge in new Covid cases in Europe and Canada, and northern states in the U.S. Positive news about vaccines and treatments have been factors helping lift investor spirits this week, while markets are looking past near-term disappointments in negotiations for new fiscal stimulus in the U.S. on the expectation that it will come in the not too distant future. Polls showing an increase in Biden's lead over Trump, and an increased possibility of there being a Democrat sweep at the November 3 elections, imply both increased odds for large stimulus and reduced risk for a contested election. Elsewhere, sterling traded softer versus most peer currencies, though was near net unchanged against the dollar. UK August production and monthly GDP data disappointed. Month-on-month GDP rose 2.1%, down on the median forecast for 4.7% and moderating from July's 6.4% expansion. Chinese markets returned after a one-week hiatus. Chinese stock markets rallied in a catch-up dynamic after missing a bullish week in global markets. Data showed air passenger volumes were 91% of the volume seen during last year's Golden Week holiday, illustrating a good degree of returned normality in China. The Caixin September composite PMI came in at 54.5, down from 55.1 in August, but showing ongoing robust expansion with the rate of job creation reaching a 10-month high.

    [EUR, USD]
    EUR-USD has posted a three-day high at 1.1803, drawing in on the 18-day high seen on Tuesday at 1.1809. The pair needs to close out today above 1.1718-19 to rack this up as a second consecutive up week. Dovish remarks from ECB policymakers this week, 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, haven't had too much impact on the euro, although providing a signalling offset to the Fed's policy bias. The ECB, BoE, BoJ, RBA, RBNZ and many other central banks are pursuing similar policy courses, and thereby having less consequence on exchange rates. The prevailing EUR-USD bias is to the upside, which hinges on risk appetite holding up in global markets, as this may liberate capital shored up in safe dollar assets. The dollar's broad real effective exchange rate is richly valued, even after dropping by over 4% from the highs seen in March, and foreigners will feel the impact of a receiving income from a depreciating currency. New positive Covid tests continue to shoot up in Europe and Canada, and in northern latitude U.S. states, though the rate of serious illness (as measured by ICU admissions) and mortality rates remain at low levels, although bumping up in many places, 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, similar to what was seen in March and April in Europe, is happening. But most governments are nervous and firmly set on pursing virus-suppression-until-vaccine strategies. The associated restrictions will crimp economic activity, the net impact on EUR-USD may be to curb its upside potential.

    [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]
    Sterling is softer versus most peer currencies, though is near net unchanged against the dollar and yen at prevailing levels. UK August production and monthly GDP data disappointed. Month-on-month GDP rose 2.1%, down on the median forecast for 4.7% and moderating from July's 6.4% expansion. This marks the fourth consecutive monthly increase, though the monthly GDP index remains 9.2% down on the pre-lockdown level seen in February, although up by 21.7% from its April low. The hardest hit sector, by far, has been accommodation and food services, which is hardly a surprise. Industrial production, meanwhile, rose 0.3% m/m in August, well off the median forecast for 3.5% m/m growth and down on July's 5.2% m/m expansion. The outlook isn't good given the surge in new Covid cases, both in the UK and in Europe. New restrictions, from travel limitations to pub closures to local lockdowns, are being introduced almost daily in the UK, and this will have a negative impact on economic activity. The government's furlough scheme is being withdrawn this month, being replaced by a narrower, more targetted wage protection scheme, though the Chancellor has announced there will be a new scheme to support those affected by local lockdowns. Dovish signalling has come from the BoE governor this week, though he is singing from the same hymn similar as policymakers at other central banks, and so this hasn't draw much response in the forex market. Attention remains fixated on the final phase of talks between the EU and UK, with less than one week to go until the EU's summit. Despite the public brinkmanship, there have been reports from behind the scenes of motion toward finding a compromise on key issues from both UK and EU sources. Any news of a deal would likely boost sterling over the near term. But, even with a deal, and even with UK progress in signing continuity agreements with non-EU trading partners, the UK will see its terms of trade position deteriorate. It has also become increasingly clear that London's European dominance in financial services will erode, deal or not.

    [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 has posted a three-week low at 1.3158 while CAD-JPY has hit a 24-day peak. An near 11% rally in oil prices over the last week (although lower today) has been underpinning the Canadian dollar, and other oil-correlating currencies. This comes with risk appetite in global markets holding up, despite the surge in new Covid cases in Europe and Canada, and northern states in the U.S. Positive news about vaccines and treatments have been factors helping lift investor spirits this week, while markets are looking past near-term disappointments in negotiations for new fiscal stimulus in the U.S. on the expectation that it will come in the not too distant future. Polls showing an increase in Biden's lead over Trump, and an increased possibility of there being a Democrat sweep at the November 3 elections, also imply increased odds for large stimulus, along with reducing the risk of the election being contested. On Canada's domestic front, rising positive Covid tests are becoming a problem as they are leading to economically disruptive restrictions, although given the oil factor this is unlikely to undermine the Canadian dollar. Canada's September employment report is up on today, 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%.

    Paste link in email or IM