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By XE Market Analysis September 16, 2020 7:34 am
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    XE Market Analysis: North America - Sep 16, 2020

    The dollar has been trading softer into the FOMC announcement. EUR-USD rallied by just over 50 pips from the intraday low in posting a high at 1.1882, nearing yesterday's six-day peak. Dollar weakness has been facilitated by relatively strong gains (0.5%, give or take) in Cable and AUD-USD. Regarding the FOMC, no changes are expected in policy, and while the central bank will likely present upward revisions to U.S. economic projections, the recently codified lower-for-longer monetary policy regime is driving a bearish dollar sentiment. The dollar is also correlating inversely with global stock markets. These factors appear to be outweighing recent ECB signalling about its concerned about euro strength, which partly counterbalances the easing measures implemented earlier in the year. The pound has rallied to six-day highs against both the dollar and euro. Cable's high is 1.2972. The gains in the UK currency have been concurrent with market narratives showing a measure of incredulity about the UK government's insistence that it is serious about its threat to leave the EU's single market at year-end without a new trade deal, given the massive near-term disruptive impact it would have on the economy, the divisions appearing within the Conservative Party and among UK nations. Even though the controversial Internal Market Bill sailed through the House of Commons, the proposed legislation is likely to have a tougher time in the House of Lords, and in any case there are suspicions that the legislation is merely a gambit of PM Johnson and his cabinet to up the ante and strengthen their negotiating position into the final weeks of talks. This fits with expectations that a more practical attitude will be seen in trade negotiations once state leaders become directly involved in the run-in to the October 15th-16th EU summit. This backdrop has lessened the bearish conviction markets have with regard to the pound. Elsewhere, USD-JPY dropped to a seven-week low at 105.03, which is the culmination of a three consecutive day run lower from levels above 106.00.

    [EUR, USD]
    EUR-USD rallied by just over 50 pips from the intraday low in posting a high at 1.1882. This swings yesterday's six-day peak at 1.1901 back into the scopes. Dollar weakness is driving the move, which is being facilitated by strong gains (0.5%, give or take) in Cable and AUD-USD. Attention is on the Fed's post-FOMC communication later today. No changes are expected in policy, and while the central bank will likely present upward revisions to U.S. economic projections, the recently codified lower-for-longer monetary policy regime is driving a bearish dollar sentiment. The dollar is also correlating inversely with global stock markets. These factors appear to be outweighing recent ECB signalling about its concerned about euro strength, which partly counterbalances the easing measures implemented earlier in the year.

    [USD, JPY]
    USD-JPY dropped to a seven-week low at 105.03, which is the culmination of a three consecutive day run lower from levels above 106.00. EUR-JPY hit a one-week low, and AUD-JPY posted a one-week low before rebounding amid a run of Aussie dollar buying. A sputtering price action across Asian and European stock markets appeared to catalyse yen buying. 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]
    The pound rallied to six-day highs against both the dollar and euro. Cable's high was 1.2950, as of the late London morning session. The gains in the UK currency have been concurrent with market narratives showing a measure of incredulity about the UK government's insistence that it is serious about its threat to leave the EU's single market at year-end without a new trade deal, given the massive near-term disruptive impact it would have on the economy, the divisions appearing within the Conservative Party and among UK nations. Even though the controversial Internal Market Bill sailed through the House of Commons, the proposed legislation is likely to have a tougher time in the House of Lords, and in any case there are suspicions that the legislation is merely a gambit of PM Johnson and his cabinet to up the ante and strengthen their negotiating position into the final weeks of talks. There are also expectations that a more practical attitude will be seen in trade negotiations once state leaders become directly involved in the run-in to the October 15th-16th EU summit. This backdrop has lessened the bearish conviction markets have with regard to the pound. UK August CPI inflation dropped sharply to 0.2% y/y from 1.0% y/y, which should be viewed as a temporary aberration, being caused by the government dropping sales tax and subsidizing customer bills in the hospitality sector.

    [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 continues to ply a narrow range in the mid 1.3100s, below the three-week high that was seen last Wednesday at 1.3261, repeatedly capping out around the 1.3200 level. Given the massive global monetary and fiscal stimulus, and continued benign inflation outlook, alongside the Fed's lower-for-longer strategy regime change on monetary policy, we expect further declines in USD-CAD. Oil prices bounced back sharply over the last day following recent hefty declines. Front-month WTI futures hit an eight-day high at $39.27. Production facilities have been idled in the Gulf of Mexico as Hurricane Sally bears down.

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