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By XE Market Analysis October 28, 2020 10:28 am
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    XE Market Analysis: North America - Oct 28, 2020

    The dollar and yen are higher on safe haven positioning, and bitcoin hit its best level in almost three years, while European and the dollar bloc currencies came under pressure alongside many currencies from the newly developed and developing world. U.S. Treasuries have remained underpinned as liquid capital seeks harbour, with the dollar holding up despite a 10bp-plus drop in the 10-year T-note yield over the last week and a corresponding decline in the U.S. yield differentials relative to peers, including the Bund. The dollar price of gold is also down 1.5% over the last week in a further confirmation that the greenback is functioning as a safe haven. U.S. and European equity markets are continuing to markedly underperform Asian counterparts, with the latter region faring much better with regard to the Covid situation. This appeared to support the otherwise Australian dollar during the Asia-Pacific session, though true to its commodity-correlating risk-sensitive form, the currency came under heavy pressure in London trading, with AUD-USD diving 1% from a 13-day high at 0.7157 to a one-week low at 0.7086. As for the U.S. dollar, the DXY index rose 0.5% in pegging an eight-day high at 93.40, while EUR-USD concurrently dropped to a nine-day lows below 1.1750. Cable dove by over 0.5% in printing a one-week low at 1.2963. Yen outperformance tilted USD-JPY lower, with the pairing hitting a five-week low at 104.15 in what is now the third consecutive week of decline. Given the yen's real interest differential advantage over the dollar, there is mathematical logic for weakness in the nominal dollar versus yen exchange rate. Elsewhere, a 4%-plus plunge in oil prices lifted USD-CAD to a 13-day high at 1.3248.

    [EUR, USD]
    EUR-USD dropped to nine-day lows under 1.1750, driven lower by broad dollar demand amid a risk-off positioning theme in global markets. EUR-JPY also dropped for the same reason, while the common currency has fared better against the pound and other European currencies, particularly the currencies of the open economies of Sweden and Norway. While last week's successful first joint EU offering of social bonds, which will finance a jobs program, attracted foreign capital and shored up the reputation of the euro, EUR-USD downside possibilities are becoming more pronounced on persisting risk aversion in global markets. This has boosted U.S. Treasury bond prices as liquid capital looks for a safe harbour, and a resulting decline in the nominal and real U.S. yield differentials versus peers hasn't had a weakening impact on the dollar. Investors are facing uncertainties presented by the surge in Covid cases in Europe and elsewhere, including now in many U.S. states and in Canada, and which are leading to ever more restrictive countermeasures. Ireland is in a full national lockdown, while Spain has announced a state of emergency and France is reportedly on the verge of a national lockdown. Strong measures are also being taken Italy and Germany, among other nations. The ongoing delay in new U.S. fiscal stimulus and the event risk posed by the upcoming U.S. elections, particularly the perceived risk of the result being contested, are other uncertainties, though not ones that are negatively impacting the dollar.

    [USD, JPY]
    The yen has been on the ascent amid a risk-off positioning theme in global markets. Global stock markets have been tumbling, with U.S. and European equity markets markedly underperforming Asian counterparts, with the latter region faring much better with regard to the Covid situation. USD-JPY hit a five-week low at 104.17 in what is now the third consecutive week of decline. Given the yen's real interest differential advantage over the dollar, there is mathematical logic for weakness in the nominal dollar versus yen exchange rate. The dominant directional force on the Japanese currency will likely 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]
    The pound has slipped into the underperforming lane, with losses against the dollar ratcheting up and with the UK currency showing declines against other currencies, although the Swedish and Norwegian krones are weaker while sterling losses against the euro have been moderate. Cable fell over 0.6% in pegging a low at 1.2964. GBP-JPY tipped lower by over 0.7% in posting a 26-day lows. This is clearly part of a more general play to short European currencies against the dollar and yen, with many major European nations reportedly on the verge of implementing national lockdowns. The UK currency was a big underperformer during the global lockdowns earlier in the year, and is again particularly vulnerable now given the need for foreign capital inflows to offset outflows generated by the UK's large current account deficit. The Brexit endgame is also in the mix. Talks between the EU and UK will continue in London today before relocating to Brussels tomorrow. They are reportedly working to a mid-November deadline. Market participants are cautiously optimistic that at least a narrow free trade deal will be reached, but still await concrete news that the two sides have reached a breakthrough on the key sticking points. With a no deal scenario now looking much less of a risk, the question now is more focused on how limited or how broad a deal might be between the EU and UK. The consensus is for a narrower rather a broader deal, and we concur with this, though it should also be considered that the EU and UK might conceivably surprise everyone with a much more comprehensive deal than is generally being expected. The Covid situation may be a motivation for this, and it should be remembered that the two sides are starting from perfect equivalence, so a broad agreement is entirely feasible. Even some Brexit ideologues in the UK have suggested that maintaining close alignment with EU rules -- for now -- may be the more pragmatic way forward given the Covid crisis, before diverging from EU rules in an evolving process over time. The central criteria for the pound's future trajectory will be what impact any deal has on the UK's terms of trade. The narrower any trade deal is, the bigger the impact on the UK's trading position will be on January 1.

    [USD, CHF]
    The Swiss franc has been trading with a firming bias, consistently rebounding from bouts of weakness in recent months and briefly driving the EUR-CHF cross to levels under 1.0700 for the first time in three months. Markets are anticipating revamped monetary easing measures from the ECB while factoring in Brexit risk. The franc has a proclivity to ascend on the back of its balance of payments position. The SNB stated at its quarterly monetary policy review last month that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market."

    [USD, CAD]
    USD-CAD lifted out of a correction low at 1.3169 with oil prices, although up yesterday's lows, coming under moderate pressure during the early London session. WTI benchmark crude prices are down 6.5% from week-ago levels, and prospects for a sustain rebound look to be limited given the supply glut and weakening demand as Covid-containing measures intensify across Europe and some parts of North America. This backdrop should keep USD-CAD underpinned. The pair has been trending lower since March, though we have been noting trend derailing risks. A run to levels around 1.3500 and above seems likely.

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