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By XE Market Analysis September 9, 2020 7:26 am
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    XE Market Analysis: North America - Sep 09, 2020

    Dollar and yen firmness, and sterling underperformance has continued for a second day. The narrow trade-weighted USD index (DXY) lifted to a one-month peak at 93.64, extending the rebound from the 29-month low that was seen last week at 91.75. EUR-USD concurrently carved at a one-month low at 1.1753. USD-JPY ebbed to an eight-day low at 105.83. The yen also firmed against other currencies, with EUR-JPY posting a near three-week low and AUD-JPY drifting into two-week low territory, reflecting safe haven demand for the Japanese currency following a further sharp tumble on Wall Street yesterday and a drop in Asian equity markets today. A moderate rebound in European stock markets and U.S. index futures saw a paring in the yen's gains. The pound, meanwhile, dove to a six-week lows against the dollar, euro and yen; at 1.2920 in the case of Cable. The UK government will publish its controversial Internal Markets Bill today, which will override parts of the EU Withdrawal Bill. This has greatly raised odds for the UK leaving the EU's single market without a new deal. USD-CAD continued on an upward path and pegged a 23-day high at 1.3260. The 17%-odd plunge in oil prices from last week's highs through to yesterday's low has been weighing on the Canadian dollar, and other oil-correlating currencies. Crude prices today stabilized, but remain sharply down from week- and month-ago levels.

    [EUR, USD]
    EUR-USD carved at a 13-day low at 1.1758 earlier, while EUR-JPY lifted into three-week territory, which were a product of respective dollar and yen firmness. The euro concurrently lifted to six-week highs versus the underperforming pound, where markets are factoring in a sea-change in risk of the UK exiting the EU's single market without a trade deal. The declines in EUR-USD will be testing the resolve of speculative dollar short positions. The above-forecast August U.S. jobs report still has some resonance, while the backdrop of the recent sharp tumble in global stock markets, along with falling Treasury yields, suggests market participants are viewing the dollar as a safe haven once again. That the dollar has come off its highs amid a rebound in European stocks and U.S. index futures also fits this hypothesis. Recent sharp declines in Cable have been a factor in weighing on EUR-USD, given the confluence of the rally in EUR-GBP, with markets ascribing asymmetrical risks to the Brexit endgame. The focus is now on tomorrow's ECB governing council meeting after bearish members recently voiced their concern about the recent uptrend in EUR-USD. While we expect a strengthening in the "lower for longer" message, any hopes of a clear signal of additional easing or even further rate cuts are likely to be disappointed. The U.S. election on November 3 is increasingly on the minds of market participants. It's not just about the presidency, but also the Senate and House. The pandemic has injected a degree of uncertainty about the outcome, and the outcome will have major implications on fiscal policy as both parties have significantly different spending and tax policies.

    [USD, JPY]
    USD-JPY recouped to levels around 106.00 after ebbing to an eight-day low at 105.81. The yen softened a little after firming against other currencies, which saw EUR-JPY post a near three-week low and AUD-JPY drift into two-week low territory. The Japanese currency picked up a safe haven bid following a further sharp tumble on Wall Street yesterday and a drop in Asian equity markets today, before a rebound in European markets and U.S. equity index futures saw the currency correct somewhat. Losses in big tech and energy stocks, the latter affected by a 17%-odd plunge in oil prices from last week's highs, had been driving the three-day losing streak on Wall Street, which spilt into global markets. A variety of factors coalesced, including concerns about unrealistic tech valuations, a continued erosion in the U.S.-China relationship, fears over a slowing in growth, concerns over a coronavirus vaccine (testing of the Oxford Uni/AstraZeneca's candidate vaccine has delayed on concerns about its safety), lack of another economic relief package in the U.S., rising jitters over the November 3 election in the U.S., and the increased risk of a no-deal Brexit. The continued ramping up in coronavirus testing in many countries, which is producing a noisy surge in positive results (the shear volume in testing means that even a 1% rate of false positives produces scary looking numbers), along with the approach of winter in the northern hemisphere, is maintaining the media-driven coronavirus psychosis, despite a lack of corresponding rises in hospitalisations/deaths. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the yen has a profile of being a low-beta haven currency.

    [GBP, USD]
    Sterling has hit fresh six-week lows against the dollar, euro and yen. The low in Cable is 1.2920, which marks a 4%-plus decline from the last week's nine-month high at 1.3484. The UK government will publish its controversial Internal Markets Bill today, which will override parts of the EU Withdrawal Bill. A senior minister admitted yesterday that it breaks international law, and the head of the UK government's legal department quit (in apparent disgust). This proposed legislation has greatly raised the odds for the UK leaving the EU's single market without a new deal. The decline the pound has seen against the euro underscores the asymmetrical risk that market participants are ascribing to the UK under the new situation. The Internal Market Bill, coupled with a finance bill planned for later in the year, will give ministers the power to tweak protocols that affect Northern Ireland trade with the rest of the UK, and will also enhance the UK's state aid autonomy -- which is be inharmonious with the EU's regime for limited state aid. This has put the UK on a crash course with Brussels. The controversial proposal is not surprisingly kicking up a storm on both sides of the Channel, including criticism from backbench (non-Cabinet) members of PM Johnson's own party and from UK nations outside England. Aside from raising the chance for a no-deal Brexit, the legislation will increase the odds for Scotland (which voted to remain in the EU) eventually breaking away the UK. The continued ramping up in coronavirus testing in the UK, meanwhile, is producing a noisy surge in positive results. The shear volume in testing means that even a 1% rate of false positives may be producing scary looking 1,800 new "cases" per day. Along with the approach of winter, the 'case-demic' (rising numbers of positive tests in juxtaposition to a lack of corresponding rises in hospitalisations/deaths, as seen in the 2009 swine flu episode) is maintaining the media-driven coronavirus psychosis. The economic impact of this should not be underestimated. Gatherings of more than six people are now being banned in the UK. We anticipate further sharp declines in the pound.

    [USD, CHF]
    EUR-CHF has settled around the 1.0800 level, a level that the cross has repeatedly failed to sustain gains above over the last couple of months. The influence of the SNB's intervening hand may have been at play during the recent upside bursts. Total Swiss sight deposits of francs have risen by over 130 bln since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. EUR-CHF still remains below the seven-month peak that was seen in early June at 1.0921. One downside risk for EUR-CHF is the Brexit endgame, which is fast approaching. The latest reports suggest the EU and UK are in a total impasse just one month before a deal has to be struck before the UK leaves the EU's single market at year-end. The risk is that the two sides will reach only a bare bones deal, or even no deal at all. The prospect for this would be de-stabilising for both the pound and euro, and would likely underpin the franc.

    [USD, CAD]
    USD-CAD continued on an upward path and pegged a 23-day high at 1.3260. A generally firmer U.S. currency and weak oil prices have remained in play. Front-month WTI futures tumbled by around 17% from last week's high through to yesterday's low at $36.13, which is the lowest level seen since mid June. WTI benchmark prices have managed a bounce today back above $37, but remain down by over 10% form week-ago levels, and prospects for a sustained rebound appear to be limited given the flattening out in the recovery pace of the global economy, large crude stockpiles, and uncertainty about Chinese demand (which has been importing crude in record quantities in recent months, but may now be ready to slow this process down. This backdrop should maintain pressure on oil-correlating currencies, such as the Canadian dollar.

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