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By XE Market Analysis September 10, 2020 10:57 am
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    XE Market Analysis: North America - Sep 10, 2020

    The dollar has been on the ebb, inversely correlating with the strong rebound on Wall Street yesterday, which spilled over to most Asian stock markets today. The USD index (DXY) drifted to a two-day low at 93.02, while EUR-USD etched out a three-day high at 1.1846, extending the rebound from yesterday's one-month low at 1.1753. Cable lifted to a two-day high at 1.3036, extending gains out of the six-week low that was seen yesterday at 1.2884, before retreating back under 1.3000. The pound came under pressure against the euro, which lifted EUR-GBP by nearly 0.5%, although the cross remained below the six-week peak that was seen yesterday. According to the UK tabloid The Sun, the motivation for the government to bring legislation that overrides some parts of the EU Withdrawal Agreement was catalysed by what it understood to be "veiled threats" made by the EU chief negotiator Barnier's team that the EU could ultimately ban exports of food into Northern Ireland from other parts of the UK in the even of a no-deal scenario. High level officials will be meeting today via the EU-UK Joint Committee, at the request of the European Commission. What's now clear is that the UK government is going for the jugular, attempting to turn an inherently weak negotiating position into a stronger one by making it clear that it is quite prepared for a no-deal exit from the single market -- even if it means a hard border on Ireland. The UK won't back down in today's talks, which will likely spark fresh declines in the pound. On the one hand UK PM Johnson is gambling that heads of state will cede ground, which looks a tall order as it would only take one EU member country to veto to scupper any agreement, and on the other hand, he and his Brexit-idealogue filled cabinet, are looking serious about leaving without a deal. Elsewhere in the currency realm, USD-JPY has continued a narrow orbit of the 106.00 level, which roughly marks the midway point of a range that's been prevailing since early August.

    [EUR, USD]
    EUR-USD etched out a three-day high at 1.1846, further extending the rebound from yesterday's one-month low at 1.1753. The move reflected an ebb in the dollar, which has inversely correlated with the strong rebound on Wall Street yesterday, which spilled over to most Asian stock markets today, though stocks in Europe have sputtered and U.S. index futures are now down by 0.5%. ECB policy is front and centre for markets today, jostling with Brexit issues. Dovish members of the governing council have recently expressed their disquiet about the recent sharp gains EUR-USD saw, which last culminated with the euro reaching 28-month highs above 1.2000. The high was seen after the Fed announced its regime shift, which is now focused on stirring inflation as well as capping it, depending on the circumstance. The ECB is amid a strategy review, too, but this is not expected to completed until next year. We think the best markets can hope for is a strengthening of the 'lower for longer' message, although the door to additional measures will remain open against the background of ongoing lockdown disruptions and the increasingly real chance of a no-deal Brexit scenario. It looks unlikely that the ECB's message today inspire euro selling, as a dovish lean is anticipated by participants. Recent sharp gains in EUR-GBP, which rallied back above 0.9100 for the first time since July, shows that the market is ascribing asymmetrical risk between the EU and UK from the consequences of a no-deal Brexit, the risks for which have jumped higher this week.

    [USD, JPY]
    USD-JPY has continued a narrow orbit of the 106.00 level, which roughly marks the midway point of a range that's been prevailing since early August. Yen crosses have also been seeing narrow ranges. The ECB meeting and the extraordinary meeting of the UK-EU Joint Committee today have been cause for market participants to sit on their hands. A dovish signal is expected from the former, while the EU, angry at the UK government's legislation that unilaterally overwrites parts of the Withdrawal Agreement, thereby breaking international law, is demanding answers. Japanese data today showed core machinery orders rising by a more than expected 6.3% m/m, though to little market impact. 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 a low-beta haven currency.

    [GBP, USD]
    Reasons to be bearish on the pound: Market participants are looking for a signal on Brexit from today's extraordinary meeting of the EU-UK Joint Committee. The UK government has already made its move, to bring forward legislation that will break international law by overriding parts of the EU Withdrawal Agreement, and Brussels has responded by expressing its consternation and distrust with London. It's hard to see what the meeting can resolve, and this makes the pound vulnerable to another lurch lower. There are other considerations on the UK's domestic front. Aside from the disquiet Johnson's move has brought to UK member nations, the House of Lords (the upper house in Parliament) could attempt to block the new legislation on the grounds that it breaks international law and the promise the government made to the electorate in its manifesto, which stated that the Withdrawal Agreement was "a great deal" and "signed, sealed and delivered." If the government resisted, it could have major constitutional implications, according to political pundits. Amid all this, the government has this week mandated a "rule of six," banning gatherings of more than six due to a surge in coronavirus cases. Police forces around the nation have set up online forms where people can snitch on the neighbours if they are more than six people gathering at their homes. The irony is that the government is asking for compliance while at the same time publicly wilfully breaching international law. There is already a growing segment of the population that aren't fearful of the coronavirus (as can be gleaned by every a cursory observation of people interactions in pubs and other public areas); cases are rising, but without a corresponding rise in serious illness, hospitalisations or deaths, as is the situation across Europe now. The majority of people don't know anyone who has been hospitalized due to the coronavirus, and by instinct don't think there is a pandemic any more. The government is now planning to raise daily testing from about 180k per day now to 3 mln per day by December and to 10 mln per day in January. This means more localized lockdowns are likely, possibly much more than we have seen over the last couple of months, which means more economic disruption. This is another potential negative for the pound, which fell sharply against its peers during the national lockdowns over the March-April period.

    [USD, CHF]
    EUR-CHF has ebbed back to familiar levels in the mid 1.0700s after the latest drop back from forays above the 1.0800 level. The cross has repeatedly failed to sustain gains above 1.0800 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 lifted out of a two-day low at 1.3129. Oil prices dropped by over 1.5% during the London morning, reversing some of yesterday's rebound. Crude prices saw a 17%-odd tumble from last week's highs, which has imparted a downside spine on oil-correlating currencies, such as the Canadian buck. The flattening out in the recovery pace of the global economy, juxtaposed to large global 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), caused the rotation lower in oil prices.

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