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By XE Market Analysis September 14, 2020 8:01 am
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    XE Market Analysis: North America - Sep 14, 2020

    The dollar has softened against its peers amid a risk-on backdrop on global stock markets. News that University of Oxford/AstraZeneca resumed its phase-3 trial of its candidate vaccine for the coronavirus was taken as a buying cue for stock investors. That plus news of a batch of major merger activity. The USD index (DXY) dropped by 0.4% in pegging a low at 93.00, breaching below Friday's low at 93.10 on route. EUR-USD lifted to a four-day peak at 1.1877. USD-JPY ebbed back under 106.00. Amid the dollar weakening theme was a pound rebounding theme. Cable lifted by 0.7% to a 1.2883 high and EUR-GBP ebbed by over 0.4% to a 0.9214 low. The rebound in sterling only partially retraced the steep declines the currency saw last week. At prevailing levels (early London PM) the pound remained down by 2.4% from week-ago levels, and by 2.8% in the case against the euro. We are viewing the pound's rally a dead cat bounce. EU-UK and intra-UK tensions are running high following the UK government's gambit to unilaterally amend the EU Withdrawal Agreement. There has been a surge in coronavirus cases in the UK, like other countries in Europe, which has led the UK government to introduce fresh nationwide social restrictions and impose a lockdown on the country's second biggest city, Birmingham. The UK's wage support scheme is also due to expire in October, and the government's official line is that it is not going to be extended. Elsewhere, USD-CAD has been plying a narrow range in the mid 1.3100s.

    [EUR, USD]
    EUR-USD lifted to a four-day peak at 1.1877. The ECB last week delivered less doivsh than expected guidance following its regular policy meeting last week. It's clear that the doves at the governing council who are concerned about the euro's recent ascent are for now outnumbered by members who take a more sanguine view. This gave EUR-USD a boost, though the market lack the impetus to sustain buying. One issue is that there is a fully fledged case-demic occurring in some large European countries, including Spain and France, with the consequence of increased restrictions (although not nationwide lockdowns). It should be stressed that there remains no sign of a true so-called second wave in terms of an actual public health event -- serious illness, hospitalisations, deaths, but governments (Sweden by the exception) are eager to impose new restrictions. The new cases, along with the death rate, are trending lower in the U.S., which should help the economy on the road back to economic normalcy. The contrasting situations, for now, should present a countervailing force on EUR-USD's uptrend, providing an offset to the somewhat differing ECB and Fed stances, with the latter having adopted a strategy of raising inflation. In the the U.S., the failure of the Senate last week to get its "skinny" $500 bln relief measures through a procedural vote seemed to hit a nerve, while Leader McConnell said it was a toss up whether the Republicans would retain the Senate at the upcoming election on November 3. The outcome of the election will have major implications on fiscal policy as the Republican and Democratic parties have significantly different spending and tax policies. The steady erosion in U.S.-China, and more broadly West-China relations, also remains in play.

    [USD, JPY]
    USD-JPY broke below Friday's low and 106.00, a level that the pair has been orbiting since early August. Market participants haven't as yet been tempted to sell yen amid a backdrop of rallying global stock markets. News that University of Oxford/AstraZeneca resumed its phase-3 trial of its candidate vaccine for the coronavirus was taken as a buying cue for stock investors. The trial had been paused last week after one of its volunteers fell ill. In Japan, the focus is on the leadership election of the ruling LDP party, which will produce the new prime minister after Shinzo Abe stepped down. Yoshihide Suga is expected to win by a large margin. He is expected to be confirmed in the Diet on Wednesday. No major changes to prevailing policies would be expected should he indeed be confirmed as the new PM. He is a supporter of 'Abenomics'. Large fiscal stimulus is already in the works, and the close relationship between government and the BoJ would be maintained. 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 an established profile of a low-beta haven currency.

    [GBP, USD]
    Cable lifted by 0.7% to a 1.2883 high and EUR-GBP ebbed by over 0.4% to a 0.9214 low. The rebound in sterling only partially retraced the steep declines the currency saw last week. At prevailing levels (early London PM) the pound remained down by 2.4% from week-ago levels, and by 2.8% in the case against the euro. We are viewing the pound's rally a dead cat bounce. EU-UK and intra-UK tensions are running high following the UK government's gambit to unilaterally amend the EU Withdrawal Agreement. There has been a surge in coronavirus cases in the UK, like other countries in Europe, which has led the UK government to introduce fresh nationwide social restrictions and impose a lockdown on the country's second biggest city, Birmingham. The UK's wage support scheme is also due to expire in October, and the government's official line is that it is not going to be extended.

    [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 has been plying a narrow range in the mid 1.3100s, below the three-week high that was seen last Wednesday at 1.3261. Oil prices have stabilized in recent days following a near 20% tumble, which has arrested the recent decent in oil-correlating currencies, such as the Canadian dollar. 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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