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By XE Market Analysis September 15, 2020 7:33 am
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    XE Market Analysis: North America - Sep 15, 2020

    The dollar softened against its peers amid a background theme of rallying global stock markets. The USD index (DXY) printed a five-day low at 92.79, while EUR-USD concurrently pegged a five-day high at 1.1900. USD-JPY ebbed modestly lower and posted a 15-day low at 105.53. AUD-USD rallied by over 0.7% to a 12-day high at 0.7338. The release of the latest RBA minutes, although stating "a lower exchange rate would provide more assistance to the Australian economy," sparked initial Aussie dollar buying as markets deemed the minutes to be less dovish in overall tone than had been anticipated. The Aussie was subsequently given a further lift by the above-forecast Chinese data. Sterling firmed against most the other main currencies, with the exception of the the Aussie and Kiwi dollars. Cable printed a five-day high at 1.2926. Equity markets have been rallying. The S&P 500 mini was showing a 0.7% gain as of the early London afternoon, building on yesterday's 1%-plus rise. European equities rallied, as did most Asia stock markets, though some markets, including Japan and Australia, declined. This week has brought positive news on the Covid-19 vaccine and treatment front, while news of some mega mergers, along with above-forecast data out of China, including industrial production and retail sales, and the PBoC's liquidity injection of 600 bln yuan via a 1 year MLF, have collectively floated investor spirits. The German ZEW investor confidence survey for September was also a beat, leaving the ECB's baseline forecast scenario unchallenged. Brexit and virus/casedemic developments the key factors that ECB policymakers will be watching closely. Market participants are also looking to the FOMC, which starts its two-day meeting today, and its policy statement and new Summary of Economic Projections (SEP) on Wednesday. Chair Powell largely pre-empted this meeting in terms of the policy regime change. We expect upward revision in the Fed's GDP and inflation outlooks, and a downward bump to unemployment as a consequence. This may give the dollar a lift, though the lower-for-longer strategy on interest rates offsets.

    [EUR, USD]
    EUR-USD pegged a five-day high at 1.1900, reflecting broad dollar softness. The euro has also firmed against a generally soft yen, though has lost ground to the outperforming Aussie dollar. Against other currencies, the common currency has been trading neutrally, for the most part. Market participants are looking to the FOMC, which starts its two-day meeting today, and its policy statement and new Summary of Economic Projections (SEP) on Wednesday. Chair Powell largely pre-empted this meeting in terms of policy with his Jackson Hole announcement of the FOMC's new strategies where it will pursue an average inflation target and monitor any shortfall in employment. We expect upward revision in the Fed's GDP and inflation outlooks, and a downward bump to unemployment, as a consequence of its regime change. The upward revisions to growth may give the dollar a lift, though the lower-for-longer strategy on interest rates offsets. The dollar is also correlating inversely with rising global stock markets. As for the euro, the September ZEW investor confidence survey beat the median forecast, and the three-month rolling trend rate has maintained the improving trend that's been seen since March in the case of the expectations reading, and since July in the current conditions indicator. Nothing yet to shake the ECB's baseline scenario, with Brexit and virus/casedemic developments the key factors that policymakers will be watching closely. A potential euro negative is the implementation of new restrictions and localized lockdowns in response to a surge in new coronavirus cases in some large European countries. It is also becoming clearer that the ECB is concerned about the ascending trend in the euro, with President Lagarde stating over the week that forex matters, that the recent appreciation has counterbalanced part of the easing measures implemented during the pandemic

    [USD, JPY]
    USD-JPY has been flatlining in the mid-to-upper 105.00s, consolidating yesterday's decline from levels above 106.00. Most yen crosses, meanwhile, are firmer, partly reflecting broader softness in the Japanese currency following the rally on Wall Street yesterday and amid gains seen on most Asian stock markets today. Data out of China, including industrial production and retail sales, beat expectations and the PBOC injected 600 bln yuan via a 1 year MLF, which helped maintain a mostly risk-on vibe in Asia. As expected, Yoshihide Suga is set to become the new prime minister of Japan, replacing Shinzo Abe, who stepped down on medical grounds. Suga will 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 will 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]
    Sterling is seeing a somewhat mixed performance, rising against the generally soft dollar and yen, seeing modest gains on the euro and Canadian dollar, while holding broadly steady against the Aussie and Kiwi dollars. UK labour data today had little impact, with market participants focused on a range of dominating issues. Cable gained by about 0.3% in posting a high at 1.2900. Yesterday's five-day high is at 1.2920, while the seven-week low that was seen last week is at 1.2763. We view the pound's bounce from lows as being of the dead cat variety. The UK government's controversial Internal Markets Bill was passed in the House of Commons, and will now go the House of Lords. EU-UK and intra-UK tensions are running high due to PM Johnson's gambit to unilaterally amend the EU Withdrawal Agreement. The EU has delivered an ultimatum to reverse the decision, the UK said it won't. Amid the mix, the European Commission is proposing to strip London of its nearly 1 trillion-a-day euro clearing business, which would seem highly likely in the even of a no-deal Brexit. This illustrates the asymmetry between the UK and EU in trade negotiations. Estimates of cost to London in losing euro clearing are up to 83,000 jobs being lost (transferred into the Eurozone) and a loss of GBP 63 bln in revenue. A limited trade deal with the EU seems the best that can be hoped for at this stage, which is likely to be thrashed out in October when state leaders, rather than trade envoys, become directly involved. There has, meanwhile, 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 pandemic-era 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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