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By XE Market Analysis October 19, 2020 8:16 am
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    XE Market Analysis: North America - Oct 19, 2020

    The dollar and yen softened against other currencies as risk-on positioning ensued. Pfizer said it could have a vaccine ready by year-end, and with House Speaker Pelosi saying on Sunday that she was confident that a comprehensive U.S. aid package could be legislated for by the November-3 elections. And while Q3 GDP data out of China disappointed, a slew of September numbers, including industrial production, retail sales and unemployment, beat forecasts and signalling an acceleration in economic activity. S&P 500 E-minis were showing a 0.9% gain as of the early London afternoon. European stock markets were showing much more moderate gains, as an ongoing surge in new Covid cases is leading to increasingly draconian restrictions in many European countries. The USD index (DXY) ebbed to a five-day low at 93.35 as EUR-USD lifted to a five-day high at 1.1768. USD-JPY edged out a four-day high at 105.50 before retreating to near net unchanged levels around 105.35-37. The Australian dollar found a footing after underperforming markedly last week (as a consequence of yuan weakening, trade tensions with China, and risk-off positioning). AUD-USD saw a four-day peak at 0.7116. The New Zealand dollar also posted a four-day high against the U.S. dollar, at 0.6630, after the weekend election returned the incumbent Arden government, with its fiscally expansive bias, with a bigger majority. Elsewhere, the pound rallied above its Friday highs against both the dollar and yen. Cable gained about 0.7% in making a peak at 1.3014, and EUR-GBP fell by nearly 0.4% in making a low at 0.9023. The market saw through Boris Johnson's high jinks on Friday, when he stated that talks with the EU were over. Talks will be continuing this week, with the EU's Barnier and the UK's Frost due to hold a video conference today. The consensus expectation remains for a limited deal to be produced by mid November. On fishing, a principal sticking point, a simple win-win versus lose-lose choice should mean a compromise is found. Regarding Johnson's Internal Market Bill, the expectation is that he will concede by removing the offending passages in it (i.e. remove the parts that would enable the UK government to unilaterally overwrite parts of the Withdrawal Agreement), which was likely his plan all along.

    [EUR, USD]
    The euro has gained against most currencies during the European morning session, with the notable exceptions of the pound, alongside the Australian and New Zealand dollars. A prevailing view that the EU and UK, despite the headline dramatics, are heading for a free trade deal, albeit a limited one, have helped give both the pound and euro an underpinning. Buoyant stock markets have been an added factor in underpinning EUR-USD and EUR-JPY, given the suppressing effect on the dollar and yen as risk premia are adjusted. These considerations have offset the surge in new Covid cases in Europe, which has accelerated in some countries and is leading to increasingly draconian restrictions, which will have consequences on economic activity and maintain the pressure on the ECB for more expansive monetary accommodation. While we are would-be dollar bears, the proclivity for capital being safe harboured in 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 upcoming U.S. elections present risks too, particularly given the perceived chance of the election being contested. Markets are anticipating another U.S. fiscal package, although the timing remains uncertain, and the size and scope of it will be dependent on the election result. Wall Street narratives suggest that U.S. stock markets are pricing in a blue wave on November 3, with Democrats sweeping the House, Senate and Presidency, which would result in many trillions of dollars in fiscal support. On balance, and despite the prevailing upside bias, we remain bearish on EUR-USD at this juncture.

    [USD, JPY]
    USD-JPY edged out a four-day high at 105.50, reflecting moderate yen weakness, which was driven by a pick up in risk appetite in global markets on hopes Covid vaccine and U.S. fiscal stimulus. 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 rallied above its Friday highs against both the dollar and yen. Cable gained about 0.7% in making a peak at 1.3014, and EUR-GBP fell by nearly 0.4% in making a low at 0.9023. The market saw through Boris Johnson's high jinks on Friday, when he stated that talks with the EU were over. Talks will be continuing this week, with the EU's Barnier and the UK's Frost due to hold a video conference later today. The consensus expectation remains for a limited deal to be produced by mid November. On fishing, a principal sticking point, a simple win-win versus lose-lose choice should mean a compromise is found. Regarding Johnson's Internal Market Bill, the expectation is that he will concede by removing the offending passages in it (i.e. remove the parts that would enable the UK government to unilaterally overwrite parts of the Withdrawal Agreement), which was likely his plan all along. The expected narrow trade deal will likely the beginning of a evolving process in EU-UK relations. The UK will likely remain closely aligned with EU rules for another year, but may then seek to diverge from them as the UK economy reorientates, which would require revisions to the EU and UK agreement. We remain bearish on the pound over the medium term. Assuming that a no-deal scenario is indeed avoided and that the EU and UK strike a narrowly focused free trade deal, this will still leave the UK's terms of trade in a worsened position, which will have consequences on investment, productivity and economic growth for the foreseeable future.

    [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. This along with Brexit risk, which has been weighing on the euro. 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 posted a four-day low at 1.3168, extending the retreat from the eleven-day high seen last Thursday at 1.3261. The improvement is risk appetite has both seen the U.S. dollar soften and the Canadian dollar rise, correlating with oil prices, firm. Front-month WTI crude futures posted a 10-day high at $41.44 today, although subsequently reversing lower. Sharply rising new Covid tests remain a worry to the global outlook given the increasingly stringent countermeasures being implemented in Europe, but also areas in North America. The risk of the upcoming U.S. election being contested is also a concern, although the polling trend in favour of Biden suggests this perceived peril may at least be receding. We retain a bearish view of USD-CAD in the bigger picture, though this hinges on getting through the Covid crisis.

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