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By XE Market Analysis October 30, 2020 7:31 am
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    XE Market Analysis: North America - Oct 30, 2020

    The dollar has steadied after rallying in recent days, which has helped EUR-USD find a footing after tumbling to a one-month low at 1.1650 yesterday. EUR-JPY, however, fell to a near-four-month low, and GBP-JPY to a fresh one-month low, even though USD-JPY has remained above the five-week low it saw yesterday at 104.03. Global market sentiment remains distinctly quavery, which has been generating safe haven demand for the yen. U.S. Treasury yields have dipped back after rising yesterday. The S&P 500 E-mini has racked up a near 2% loss before recouping to a net 0.5% decline. The MSCI Asia-Pacific index is down for a third consecutive day, although outperforming North American and European indices. Most commodity prices more than recovered from intraday declines. The pound has been trading neutrally relative the euro. European Commission president, von der Leyen, yesterday reported "good progress" in trade talks with the UK. The two sides are reportedly working to a mid-November deadline. Another focus is the U.S. elections, which are up on Tuesday. Polls point to a Democratic sweep (winning the House, the Senate and the Presidency), though it should be considered there was a large polling error in 2016, and there is a risk that Trump will contest the result should he lose, which would create chaos and uncertainty with a consequence of delaying fiscal stimulus.

    [EUR, USD]
    EUR-USD found a footing after tumbling to a one-month low at 1.1650 yesterday, though EUR-JPY fell to a near-four-month low. The trend to toward national lockdowns in Europe as a countermeasure to spiralling Covid cases is pressuring the European currencies, with markets anticipating double-dip recession risk in Europe, and with the ECB and other central banks in the region levelling-up monetary accommodation. The currencies of the open economies of Sweden and Norway, with the latter's also being a correlate of oil prices, have been particularly hard hit. The prospects of larger macro stimulus in Europe and elsewhere, and the fact that the world seems to be moving closer to having vaccinations for Covid -- the feedback being mostly optimistic from advanced-stage trials of leading candidate, with Pfizer reporting this week that its version could be ready before year end -- will give investors a way of looking "across the valley" and beyond the current predicament, though anticipating the timing of when this may be is tricky with the trend in Europe moving toward further restrictions and more national lockdowns that could easily be extended beyond the planned duration. The World Health Organisation declared that the northern hemisphere is at a critical juncture with regard to the Covid-19 coronavirus, given seasonal vectors. This backdrop should maintain the European currency weakening trend for now. The Brexit situation warrants monitoring. European Commission president, von der Leyen, yesterday reported "good progress" in trade talks with the UK. The two sides are reportedly working to a mid-November deadline. Another focus is the U.S. elections, which are up on Tuesday. Polls point to a Democratic sweep (winning the House, the Senate and the Presidency), though it should be considered there was a large polling error in 2016, and there is a risk that Trump will contest the result should he lose, which would create chaos and uncertainty with a consequence of delaying fiscal stimulus.

    [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 traded firmer, with Cable lifting to the mid 1.2900s and EUR-GBP pressing in on the 0.9000 level, where the cross hasn't been in nearly two months. Month-end corporate buying of pounds was mentioned by one narrative we saw, while gains have come despite some frustrations on the Brexit front. There hasn't yet been a breakthrough on the key sticking points, and France has continued to insist it wants unchanged fishing rights in UK waters. European Commission president, von der Leyen, yesterday issued a statement putting the UK on formal notice (again) over parts of the draft Internal Market Bill, giving Boris Johnson's government until the end of November to respond. This is a repeat of what happened before, with the prior deadline having lapsed. This is likely a sideshow, with Johnson likely to remove the offending parts of the proposed legislation as part of a deal. As judged by the pound's price action, markets are working on the thesis that EU and UK will reach at least a narrow free trade deal. Market participants are well familiar with the running-down-the-clock ploy, which has been seen before in prior Brexit negotiations, and at the same time aware to the pressing need, intensified by the Covid crisis, for both sides to reach an agreement. Johnson, meanwhile, is coming under pressure to follow the likes of France and German with another full national lockdown as Covid cases continue to billow. The UK currency was a big underperformer during the global lockdowns earlier in the year, and is again vulnerable should capital inflows be disrupted. The UK needs foreign capital inflows to offset outflows generated by the UK's large current account deficit.

    [USD, CHF]
    EUR-CHF has this week been pulled under 1.0700 by broad declines in the euro and with the ECB levelling-up monetary accommodation. The ECB's policy course is in effect supplementing the Swiss currency's chronic firming bias by weakening the euro, with the EUR-CHF cross being a proxy of the franc's trade-weighted exchange rate. The franc has a fundamental underpinning rooted in Switzerland's strong balance of payments position, which features a large current account surplus to GDP. Switzerland also has the status of having the second highest GDP per capita in the world. While the SNB implements a punishing -0.75% deposit rate, real interest rates are still lower in the U.S. than they are in Switzerland, which is mathematically bearish for the nominal USD-CHF exchange rate, all else equal (and albeit very modest). Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off large speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank stated at its last quarterly monetary policy review 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 in the lower 1.3300s after yesterday rallying to a one-month peak at 1.3391. CAD-JPY, which, along with NOK-JPY, has been our favoured short, has ebbed back today, though has so far remained above the three-month low that was pegged yesterday. 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 trend-derailing forces are now bearing down. A further run higher, to levels around 1.3500 and above still seems plausible. The risk to this view would be if global markets started looking "across the valley" of the prevailing Covid predicament, especially with more stimulus in the pipeline in major economies. Getting on the other side of the U.S. election would help, as this, assuming the outcome wasn't contested, would clear the way for fiscal stimulus in the world's biggest economy. Vaccination hopes for Covid-19 may also play a role with advanced-stage trials of leading candidates reportedly going well (Pfizer said its vaccine may be ready before year-end), though the trend for now remains toward further restrictions and lockdowns in Europe, which should keep oil prices and oil-correlating currencies pressured.

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