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By XE Market Analysis October 20, 2020 7:17 am
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    XE Market Analysis: North America - Oct 20, 2020

    The euro has rallied against peer currencies. The common currency was showing, as of the late London morning, a near 0.5% gain on the dollar, and slightly more than this in the case against the yen, alongside gains of 0.7% and 0.9% versus the Australian and New Zealand dollars. EUR-USD printed a one-week high at 1.1818 while EUR-JPY ascended into eight-day high terrain. Underpinning was the EU's first offering of social bonds designed to finance a jobs program received orders of more than EUR 233 bln. The issue is the first since the EU announced the EUR 750 bln jointly funded pandemic recovery deal. The triple-A rating offering is proving to be a hit, which will likely raise demands for further joint issuance. The recovery fund is seen as a milestone by many analysts, which reduces Eurozone breakup risks. Data also showed a widening Eurozone's current account surplus in August, which offset the capital account deficit (and which will in any case increases the net surplus of interest receipts). Elsewhere, USD-JPY remained buoyant after posting a a one-week high at 105.61 in what is a second consecutive day of ascent, albeit in the context of narrow ranges. Yen crosses also rose, with the Japanese currency's weakness being concomitant with most European stock markets and U.S. equity index futures tracking higher. USD-CAD edged out a high at 1.3204, surpassing Monday's peak by 8 pips. The pound was mixed after registering as the biggest gainer yesterday. The Brexit endgame remains sharply in focus. A limited free trade deal is the consensus expectation. Headline-grabbing antics of some political leaders should be largely ignored at this stage. Markets are likely to remain skittish, overall, into the U.S. elections, which are now just two weeks away, given the perceived risk of it being contested, which in such a scenario could lead to a messy political scene for a time, and a further delay fiscal stimulus further (which looks unlikely to happen this side of the election). The ongoing surge in new Covid cases in the more northerly parts of North America and, more especially, in Europe is alarming given the concomitant implementation of ever more draconian measures.

    [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]
    The euro has rallied against peer currencies. The common currency was showing, as of the late London morning, a near 0.5% gain on the dollar, and slightly more than this in the case against the yen, alongside gains of 0.7% and 0.9% versus the Australian and New Zealand dollars. EUR-USD printed a one-week high at 1.1818 while EUR-JPY ascended into eight-day high terrain. Underpinning was the EU's first offering of social bonds designed to finance a jobs program received orders of more than EUR 233 bln. The issue is the first since the EU announced the EUR 750 bln jointly funded pandemic recovery deal. The triple-A rating offering is proving to be a hit, which will likely raise demands for further joint issuance. The recovery fund is seen as a milestone by many analysts, which reduces Eurozone breakup risks. Data also showed a widening Eurozone's current account surplus in August, which offset the capital account deficit (and which will in any case increases the net surplus of interest receipts). Elsewhere, USD-JPY remained buoyant after posting a one-week high at 105.61 in what is a second consecutive day of ascent, albeit in the context of narrow ranges. Yen crosses also rose, with the Japanese currency's weakness being concomitant with most European stock markets and U.S. equity index futures tracking higher. USD-CAD edged out a high at 1.3204, surpassing Monday's peak by 8 pips. The pound was mixed after registering as the biggest gainer yesterday. The Brexit endgame remains sharply in focus. A limited free trade deal is the consensus expectation. Headline-grabbing antics of some political leaders should be largely ignored at this stage. Markets are likely to remain skittish, overall, into the U.S. elections, which are now just two weeks away, given the perceived risk of it being contested, which in such a scenario could lead to a messy political scene for a time, and further delay fiscal stimulus further (which looks unlikely to happen this side of the election). The ongoing surge in new Covid cases in the more northerly parts of North America and, more especially, in Europe is alarming given the concomitant implementation of ever more draconian measures.

    [GBP, USD]
    The pound is mixed today after registering as the biggest gainer yesterday. Cable settled in the mid 1.2900s after yesterday pegging a high at 1.3025. Taking a step back, the BoE-calculated effective real sterling exchange rate is down by nearly 4% on the year-to-date, although up by just over 6% from the March-23 low, and is down by almost 11% from levels that were prevailing just ahead of the vote to leave the EU in late June 2016. Talks between the EU and UK are continuing, despite Boris Johnson's political grandstanding on Friday when he said that discussions were over, although having been downgraded by the Downing Street to video conferences (a EU delegation had been set to arrive in London this week). The consensus expectation remains for a limited deal to be produced by mid November and ratified on both sides of the Channel in time for the conclusion of the transition period at year end. A BBC journalist reported that the EU's Barnier is "frustrated" with leaders of coastal EU nations for not (yet) allowing him to proceed on tackling inevitable compromises on fishing rights. Political pundits and market participants appear to be confident a deal will be reached, being, from the perspective of the so-called coastal EU nations, a simple choice between no fishing rights in UK waters under a no deal scenario versus reduced quotas under an agreement. Note that currently more than half of the UK's annual fishing quota is foreign owned. Regarding Johnson's Internal Market Bill, the expectation is that he will concede by removing the offending passages in it -- i.e. the parts that would enable the UK government to unilaterally overwrite parts of the Withdrawal Agreement -- which was likely his plan all along. We remain bearish on the pound over the medium term. Swapping unfettered access to the EU's single market and customs union in place of a narrow free trade deal with increase trading friction and costs. Note that Wales has announced it will be going into a 17-day full lockdown, and that Moody's last Friday downgraded UK sovereign debt to Aa3 from Aa2.

    [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 edged out a high at 1.3202, surpassing Monday's peak by 6 pips. The Canadian dollar tracked oil prices, which have pulled back from the 11-day highs that were seen yesterday. 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 perceived 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 be receding somewhat. 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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