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By XE Market Analysis October 14, 2020 7:40 am
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    XE Market Analysis: North America - Oct 14, 2020

    There have been mixed direction themes so far today, with the dollar ebbing back after earlier posting fresh highs against many currencies, while the pound dropped quite sharply and then rebounded quite sharply, buffeted by Brexit endgame dramas. EUR-USD lifted back toward the mid 1.1700s after posting a nine-day low at 1.1719. The euro was also heavy against the yen and Swiss franc. The dollar had been underpinned by safe haven demand, though this waned, though stock markets in Europe and U.S. equity futures were negative. There was news of a setback the development of a Covid treatment in the U.S., while new Covid cases have continued to billow across Europe, leading to increasing levels of restrictions, which has taken the Netherlands to a near full scale national lockdown, with the UK and others looking likely to follow suit with short "circuit breaker" lockdowns. Sterling reversed earlier declines amid some improved mood music about EU and UK future relationship negotiations. The UK prime minister's office has indicated that it is willing to drop its October-15 deadline, and that EU chief negotiator Frost is apparently advising Boris Johnson that talks should continue, and that it will be difficult but not impossible to get an agreement -- this according to the Sun tabloid. Germany's Merkel, meanwhile, has reportedly been advising that the EU to be more "realistic" on fishing rights. An unnamed source who is involved in the negotiations is cited by Reuters saying that a deal is possible but "intensive work" is needed. Cable was showing a modest gain as of noon in London, having recouped to levels around 1.2950 from a 1.2864 low. USD-JPY was rooted in the mid 105.00s, while yen crosses saw weakness before paring declines. EUR-JPY and GBP-JPY, for instance, hit respective nine- and 12-day lows. Chinese demand for JGBs is at a three-year high, reportedly. A JPMorgan research note ponders that part of the reason may be to weaken the yuan, and notes that JGB yields are in fact favourable compared to German and Swiss paper.

    [EUR, USD]
    EUR-USD has posted a nine-day low at 1.1719. The euro has also been heavy against the yen and Swiss franc, and is now showing a decline versus the pound, which has reversed out of earlier declines. Brexit risks is a consideration for the euro, and not just the pound, with both the UK and Eurozone set to see a deterioration in their terms of trade, even in the event of a deal (though more especially the UK). The recent salvo of dovish signalling from ECB policymakers is also in the mix, contributing in offsetting dollar weakness recently. Aside from the Fed itself, and partly in response to, many other central banks have been conducting similar messaging campaigns. The dollar, meanwhile, has been lifted by safe haven demand. While we remain dollar bearish in the big picture, the proclivity for capital to harbour in the safety of U.S. Treasuries means this is hinged on the global growth outlook establishing a sustainable improving trend, and that in turn may hinge on the world getting through the Covid crisis. The world perhaps may want to get on the other side of the upcoming U.S. elections, too, given the concerns of the election being contested and the prevailing political balance failing to produce a much-needed fiscal package. Much needed given the incipient signs of the U.S. economy sinking into a liquidity trap (hoarding of cash is rendering monetary stimulus increasing impotent). The Covid situation in Europe is worsening. The next few weeks should be telling in terms of judging the actual public health impact -- as measured by ICU admissions and mortalities -- from the recent and ongoing billowing in positive Covid test results as compared to the impact seen back in March/April. The ratio of the Covid impact relative to the impact of other contagious respiratory disease should also be considered. On balance, we are bearish on EUR-USD.

    [USD, JPY]
    USD-JPY has become rooted around 105.50, while yen crosses are softer. EUR-JPY and GBP-JPY, for instance, are trading at nine- and 12-day lows, respectively. Chinese demand for JGBs is at a three-year high, reportedly. A JPMorgan research note ponders that part of the reason may be to weaken the yuan, and notes that JGB yields are in fact favourable compared to German and Swiss paper. Japanese data this week included a record 7.4% y/y rise in money supply as measured by M3, which is the broadest money aggregate. Not exactly a market mover, but given negative core inflation readings in Japan, is illustrative of the chronic liquidity funk the Japanese is in. At the same time, the negative inflation print has a tightening impact on real interest rates, which in turn imparts a positive bias on the yen. The biggest directional force on the Japanese currency will, however, remain 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 a long-established profile of a low-beta haven currency.

    [GBP, USD]
    Sterling has reversed earlier declines amid some improved mood music about EU and UK future relationship negotiations. The UK prime minister's office has indicated that it is willing to drop its October-15 deadline, and that EU chief negotiator Frost is apparently advising Boris Johnson that talks should continue, and that it will be difficult but not impossible to get an agreement -- this according to the Sun tabloid. Germany's Merkel, meanwhile, has reportedly been advising that the EU to be more "realistic" on fishing rights, that and deal has to be in "British interests as well as the interests of the 27-member EU." An unnamed source who is involved in the negotiations is cited by Reuters saying that a deal is possible but "intensive work" is needed. Cable is now showing a modest gain on the day in recouping to levels near 1.2950 from a 1.2864 low, while EUR-GBP has dropped to near 0.9060 from a high at 0.9121. The currency market is in reactionary mode, waiting on news developments as the Brexit endgame drama plays out. Johnson and the European Commission head von de Leyen will be talking this afternoon via video conference. The apparent extreme hawkishness of Spain and France on fishing rights is notable, while Johnson is under pressure from the powerful ERG faction of his party not to concede on level playing filed rules. The stakes are enormous, especially for the UK, both economically and politically, and in consideration of this we continue to expect there will be a deal, albeit a limited one. Reaching a deal would mean Johnson disappointing the ERG, and Spain, France and UK making concessions on fishing (this seems possible given it's a choice between win-win and lose-lose). Any news of a deal would likely boost sterling over the near term, but even with a deal, and even with the UK's progress in signing continuity agreements with non-EU trading partners, the UK will see its terms of trade position deteriorate.

    [USD, CHF]
    The Swiss franc has been continuing to trade with a firming bias, consistently rebounding from bouts of weakness in recent months. This has seen EUR-CHF repeatedly ebb back from brief forays above 1.0800, and the cross has fallen to the lower 1.0700s in the latest phase as markets anticipate revamped monetary easing measures from the ECB. The franc has a proclivity to ascend on the influence of incoming interest and other domestically owned investment receipts from assets held abroad, alongside net inflows generated by Switzerland's trade surplus. A higher franc has been imparting deflation, 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 the production of Swiss exports (perpetuating the nominal trend by limiting the decline in the real effective exchange rate). The SNB, nonetheless, explicitly targets the exchange rate as one of the means to achieve its policy goals. At its quarterly monetary policy review last month, the central bank stated that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market".

    [USD, CAD]
    USD-CAD scaled to a five-day high at 1.3158, building on the rebound from Monday's one-month low at 1.3099. The pair has scope to run higher given the risk-wary backdrop in global markets, which both supports the U.S. dollar and weighs on oil prices. On Canada's domestic front, rising positive Covid tests are becoming a problem as they are leading to economically disruptive restrictions, similar to Europe and parts of the U.S.

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