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By XE Market Analysis October 15, 2020 10:41 am
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    XE Market Analysis: North America - Oct 15, 2020

    The dollar and yen have been in demand again as safe haven currencies, while the Australian, along with the the pound and euro, to lessening degrees of magnitude, have been the principal weakening currencies so far today. European stock markets are down heavily, the STOXX 600 index by over 2%, and the S&P E-mini is off by nearly 1%. The USD index (DXY) rose nearly 0.5% in pegging a one-week high at 93.75. EUR-USD fell to a 13-day low at 1.1703. The euro, outside the cases against the Aussie dollar and sterling, has concurrently been losing ground to most other currencies. Brexit risks have become a pressing consideration with regard to the euro (and more acutely for the pound), with both the UK and Eurozone set to see a deterioration in their terms of trade even in the event the EU and UK made a new trade deal. Aside from Brexit, investor sentiment remains impinged by the Covid crisis. The world perhaps may also want to get on the other side of the upcoming U.S. elections, given the concerns of the election being contested and the prevailing political balance failing to produce a much-needed fiscal package. USD-JPY ebbed back after rising earlier during the Tokyo session. The magnitude of movement has been limited. A high was set at 105.33, with the pair since falling back a little. A 13-day low was seen yesterday at 105.04. Chinese JGB purchases were reportedly a factor that underpinned the yen yesterday, while Japanese importers were reportedly selling yen today (today being a "gotobi" data, a multiple of five, on which accounts are traditionally settled in Japan). As for the pound, Cable dropped over a big figure to a 1.2921 low, and EUR-GBP gain despite broader euro softness. The market is taking a more circumspect view on Brexit endgame proceedings compared to yesterday. The EU's summit today and tomorrow is now at centre stage. Reports suggest that EU leaders are of a mindset that the UK needs to show more movement before allowing talks to continue. AUD-USD dove over 1.2% in pegging a 17-day low at 0.7067 after RBA Governor Lowe signalled that a rate cut and other monetary easing are in the works. USD-CAD rose for a third consecutive day, this time printing a one-week high at 1.3207.

    [EUR, USD]
    EUR-USD fell to a 13-day low at 1.1703, reaffirming the prevailing bias to the downside. Dollar firmness is part of the equation while the euro, outside the case against the pound, has concurrently been losing ground to most other currencies. Brexit risks have become a pressing consideration with regard to the euro (while more acutely for the pound), with both the UK and Eurozone set to see a deterioration in their terms of trade, even in the event the EU and UK made a new trade deal. A recent salvo of dovish signalling from ECB policymakers has also been 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 recently. 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 is hinged on the world getting through the Covid crisis. The world perhaps may also want to get on the other side of the upcoming U.S. elections, 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 new case situation, and the response to it, is worsening, especially in Europe. 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 remain bearish on EUR-USD at this juncture.

    [USD, JPY]
    USD-JPY ebbed back after rising earlier during the Tokyo session. The magnitude of movement has been limited. A high was printed at 105.33, with the pair since falling back a little. A 13-day low was seen yesterday at 105.04. Chinese JGB purchases were reportedly a factor that underpinned the yen yesterday, while Japanese importers were reportedly selling yen today (today being a "gotobi" data, a multiple of five, on which accounts are traditionally settled in Japan). 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 in Japan is illustrative of the chronic liquidity funk the Japanese is in. At the same time, Japan's negative inflation print has a mild tightening impact on real interest rates. This contrasts to the loosening trend in the U.S. real interest rate, and the differential between the two is a structural negative for the nominal USD-JPY exchange rate (albeit modest). 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]
    The pound has been sinking versus most peers today, giving back some of the quite strong gains of yesterday. The market is taking a more circumspect view on Brexit endgame proceedings compared to yesterday. The EU's summit today and tomorrow is now at centre stage. Reports suggest that EU leaders are of a mindset that the UK needs to show more movement before allowing talks to continue. UK PM Johnson said yesterday after a call with EC head von de Leyer, according to a Downing Street spokesperson, that he was "disappointed" that more progress hadn't been made, although still noting the "desirability" of a deal. Pundits are reckoning that early November will be the absolute latest date to agree on a deal in time for the UK's year-end exit from the single market and customs union. Analysts at Goldman, JPMorgan and others are expecting a limited free trade agreement, which we concur with. The speculative portion of the currency market is in reactionary mode, waiting on and responding to news developments as the Brexit endgame drama plays out. The stakes are enormous, especially for the UK, both economically and politically -- think border and travel chaos, surge in food prices and overall plunge in terms of trade, including a big hit to the UK's service sector, alongside existential threat to the integrity of the UK. Consideration of this is why we anticipate a deal, albeit a limited one. Reaching a deal would mean Johnson disappointing the powerful ERG faction of his party, and Spain, France and UK making concessions on fishing (which seems likely 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 is up for a third consecutive day, this time printing a one-week high at 1.3207, building the rebound from Tuesday's one-month low at 1.3097. The pair has scope to run higher given the risk-wary backdrop in global markets, which may both support the U.S. dollar and weigh 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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