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By XE Market Analysis October 29, 2020 7:30 am
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    XE Market Analysis: North America - Oct 29, 2020

    The dollar and more especially the yen rebounded from intraday weakness. EUR-USD inched towards yesterday's low at 1.1717, with the pair at levels prevailing in the late London morning showing a modest 20-pip-plus (approx) decline on yesterday's low. EUR-JPY was down quite sharply, putting the cross below the 122.00 level for the first time since mid July, tracking other yen crosses as the Japanese currency found renewed safe haven demand. USD-JPY posted a new five-week low at 104.03. U.S. equity index futures pared intraday rebound gains, while European stocks flagged after an early but short-lived gain, and the 10-year Treasury note yield fell back. Most commodity prices also declined, and oil prices were down nearly 4% in the market for the WTI benchmark. Markets look to be anticipating a double-dip recession in Europe as France and Germany head into one-month national lockdowns, with other nations seemingly on the verge of joining them, along with Ireland and Wales. Investors are clearly not "looking across the valley" at this time, even with more stimulus in the pipeline. The prospect of a Democrat sweep at next week's U.S. elections, which the polls suggest (according to the Washington Post it would take a polling error larger than some states saw in 2016 to see Trump returned as President), would lead to a much more expansive U.S. fiscal policy trajectory on the one hand, but a bias to much more restrictive countermeasures against Covid on the other. On balance, and with the ECB taking a more pronounced dovish stance (watch the upcoming policy announcement), we remain bearish on both EUR-USD and EUR-JPY at this juncture. A strong U.S. Q3 GDP figure, later, is also expected. The October Eurozone ESI confidence reading was less worse than expected, and affirmed the split performance between services and manufacturing, the former of which is being roiled by Covid restrictions while the latter is being boosted by improved demand in export markets.

    [EUR, USD]
    EUR-USD inched towards yesterday's low at 1.1717, with the pair at levels prevailing in the late London morning showing a modest 20-pip-plus (approx) decline on yesterday's low. EUR-JPY was down quite sharply, putting the cross below the 122.00 level for the first time since mid July, tracking other yen crosses as the Japanese currency found renewed safe haven demand. U.S. equity index futures pared intraday rebound gains, while European stocks flagged after an early but short lived gain, and the 10-year Treasury note yield fell back. Most commodity prices also declined, and oil prices were down nearly 4% in the market for the WTI benchmark. Markets look to be anticipating a double-dip recession in Europe as France and Germany head into one-month national lockdowns, with other nations seemingly on the verge of joining them, along with Ireland and Wales. Investors are clearly not "looking across the valley" at this time, even with more stimulus in the pipeline. The prospect of Democrat sweep at next week's U.S. elections, which the polls suggest (according to the Washington Post it would take a massive polling error, and one larger than some states saw in 2016, to see Trump returned as President), would lead to a much more expansive U.S. fiscal policy trajectory on the one hand, but a bias to much more restrictive countermeasures against Covid on the other. On balance, and with the ECB taking a more pronounced dovish stance (watch the upcoming policy announcement), we remain bearish on both EUR-USD and EUR-JPY at this juncture. A strong U.S. Q3 GDP figure, later, is also expected. The October Eurozone ESI confidence reading was less worse than expected, and affirmed the split performance between services and manufacturing, the former of which is being roiled by Covid restrictions while the latter is being boosted by improved demand in export markets.

    [USD, JPY]
    The yen rallied back during the London morning after weakening earlier during pre-Europe trading in Asia. Global stock markets and most commodity markets remain weak as European nations head into national lockdowns. USD-JPY posted a new five-week low at 104.003. 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 continued to trade neutrally, lacking domestically-driven directional impetus. The UK currency was a big underperformer during the global lockdowns earlier in the year, and is again vulnerable given the trend to ever tightening restrictions and national lockdowns across both the UK and Europe. The UK needs foreign capital inflows to offset outflows generated by the UK's large current account deficit. The Brexit endgame is also in the mix. Negotiations are continuing, and the teams 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 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 has settled off yesterday's three-week high at 1.3335. CAD-JPY has also lifted after dropping sharply yesterday, when oil prices tumbled. Oil prices look likely to remain suppressed given the supply glut and weakening demand as Covid-containing measures intensify across Europe and some parts of North America. This backdrop should in turn 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 plausible.

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