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By XE Market Analysis October 21, 2020 7:19 am
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    XE Market Analysis: North America - Oct 21, 2020

    The dollar underperformed while the pound outperformed and the yen, diverging from its usual close correlation with the dollar, was measuring as the second strongest of the main currencies. Global stock markets have been skittish, with European indices dropping and U.S. equity index futures giving back gains in returning to near net unchanged levels. Sterling has rallied quite strongly, showing a 0.8% gain on the dollar at prevailing levels, although 20 pips or so off the one-week high that was seen earlier at 1.3064. EUR-GBP is back under 0.9100 and down nearly 0.5%. The market reacted to remarks from EU trade negotiator, Barnier, that talks with the UK could continued "day and night." There was also news that U.S. Trade Representative Robert Lighthizer said that that a trade agreement with the UK would come "reasonably soon." The currency market evidently remains bullish on the EU and UK reaching an agreement, although the game of chicken between the two sides is continuing. Boris Johnson's position is that the EU must fundamentally change its stance, while France's European affairs minister Clément Beaune asserted yesterday that there would be "no new approach." USD-JPY tumbled under 105.00 on route to printing a one-month low at 104.88. EUR-USD lifted to a one-month high at 1.1868. USD-CAD posted a new low for a fourth consecutive day in pegging a six-week low at 1.3080 before recouping back above 1.3100 amid a near 2% drop in oil prices.

    [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 has tumbled under 105.00 on route to printing a one-month low at 104.88. This mostly reflects broad weakness in the dollar, though EUR-JPY has concurrently down 0.3%. Other yen crosses are mixed. Some market narratives have been talking about China's recent buying spree for JGBs, which may be due to political reasons (shifting capital out of U.S. Treasuries and into other foreign government bonds, including JGBs) and/or Japanese pension fund buying of foreign assets, which resulted in yen deposits at Chinese accounts, which are then parked in JGBs. The yen is also retains an inverse correlation with global stock markets. Stock markets in Europe and turned lower and U.S. equity index futures have given back earlier gains. The dollar has remained weak despite this, suggesting markets are not presently viewing the dollar as a safe haven trade. Overall, a somewhat convoluted picture, with markets in a skittish mood, leading to choppy conditions in stocks and other markets. The approaching U.S. elections, now less than two weeks away, are seen as a risk event given the perceived risk of it be contested, which in this scenario could lead to a messy political scene for a time and delay fiscal stimulus further (which looks unlikely to happen this side of the election). The ongoing surge in new Covid cases in the more northern parts of North America and, more especially, in Europe is alarming given the associated implementation of ever more draconian measures. The biggest directional force on the Japanese currency will remain shifting risk premia in global markets. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, is recognized in the currency market and has established the yen as a low-beta haven currency.

    [GBP, USD]
    Sterling has rallied quite strongly, showing a 0.8% gain on the dollar at prevailing levels, although 20 pips or so off the one-week high that was seen earlier at 1.3064. EUR-GBP is back under 0.9100 and down nearly 0.5%. The market reacted to remarks from EU trade negotiator, Barnier, that talks with the UK could continued "day and night." There was also news that U.S. Trade Representative Robert Lighthizer said that that a trade agreement with the UK would come "reasonably soon." The currency market evidently remains bullish on the EU and UK reaching an agreement. But the game of chicken between the two sides is continuing. Boris Johnson's position is that the EU must fundamentally changes its stance, while France's European affairs minister Clément Beaune asserted yesterday that there would be "no new approach." The bullish stance of France fits with a BBC article earlier in the week reporting that Barnier has been feeling "frustrated" with leaders of coastal EU nations for not (yet) allowing him to proceed on tackling inevitable compromises on fishing rights. While fishing is a low GDP contributor on both sides of the Channel, it's a politically highly sensitive area for all, and is totemic for Brexiteers. From the perspective of the so-called coastal 8, it's a choice between no fishing rights in UK waters under a no deal scenario versus reduced quotas with an agreement. Given that, currently, more than half of the UK's annual fishing quota is foreign owned, surely a sensible resolution can be found. There is a view that some players in the EU are wanting to draw out the negotiation as long as possible to take away time for other states to propose tweaks to an agreement. We remain bearish on the pound over the medium to longer term. Swapping unfettered access to the EU's single market and customs union in place of a narrow free trade deal will see trading friction and costs rise. Note that Wales has announced it will be going into a 17-day full lockdown, and that Moody's has 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 posted a new low for a fourth consecutive day in pegging a six-week low at 1.3080. Broad weakness in the U.S. dollar has been the principal driven today, and while oil prices are down by over 1% today, this follows crude hitting a seven-week peak yesterday. USD-CAD subsequently lifted back above 1.3100 as European stock markets came under pressure. The trend is firmly to the downside, though there are derailing risks, including the U.S. election and the trend toward more draconian Covid-related measures as the northern hemisphere heads into winter. For now, ongoing expectations for expansive global fiscal and monetary policies are keeping asset markets, and asset currencies like the Canadian dollar, underpinned.

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