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By XE Market Analysis September 21, 2020 7:40 am
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    XE Market Analysis: North America - Sep 21, 2020

    The dollar and yen rallied, the latter especially so amid safe haven demand as global stock markets and commodity prices turned sharply lower, which in the case of the greenback countervailed concerns about the approaching U.S. election and lower-for-longer Fed policy regime. EUR-USD dove to a four-day low at 1.1780, after pegging a five-day high during the pre-Europe session in Asian markets, at 1.1873. USD-JPY dropped 0.5% in pegging a six-week low at 104.00, racking up today as the sixth straight trading day of declines and making this week the third consecutive week of decline. Yen crosses have also fallen as risk-off positioning courses through global markets. Concerns about the approaching U.S. election, an outlook of tapering fiscal stimulus, and a surge in new coronavirus cases across Europe, whilst still not being corresponded to with hospitalisations and mortality, is nonetheless prompting panicky governments into implementing new restrictions. The pan-Europe STOXX 600 equity index was showing a 2.8% loss, as of the late morning in London, while the S&P 500 mini was showing a 1.6% decline. So far, this could be considered a mini-replay of the market dynamics that were seen during the early phase of the global lockdowns earlier in the year. The pound came under. Cable was showing over 0.5% decline in hitting a six-day low at 1.2835, having sharply reversed out of intraday gains. The pair's recent two-month low is at 1.2763. EUR-GBP concurrently popped higher, while GBP-JPY racked up losses of nearly 1%. Sterling was a notable underperformer during the acute risk-off phase earlier in the year due to the mix of the UK being an exposed, open economy with a large current account deficit, and a similar line of reasoning is appearing in some market narratives now as rich equity market valuations clash with the evolving new reality of Covid-related re-restrictions. In the UK, localised lockdowns are now affecting 10 million people in the UK, and the government is set to announce further restrictions. Elsewhere, USD-CAD rallied to a four-day high at 1.3240, facilitated by a rebound in the U.S. dollar and a sharp drop in oil prices.

    [EUR, USD]
    EUR-USD lurched lower amid a rush for dollars, which saw the pair drop to a four-day low at 1.1780 from a five-day high at 1.1873. A sharp drop in European and global equity markets, and plunging commodity prices, has stirred saw have demand for the dollar, countervailing concerns about the approaching U.S. election and lower-for-longer Fed policy regime. The pan-Europe STOXX 600 equity index is down 2.8%, while the S&P 500 mini is showing a 1.6% decline. So far, this could be considered a mini-replay of the market dynamics that were seen during the early phase of the global lockdowns, with the surge in new coronavirus cases in Europe pushing panky governments to implement new restrictions (although hard lockdowns are being avoided). The euro has come under pressure against other currencies, most notably the yen, which has been full safe-haven driven outperformance mode, though losses against other peer currencies have been more modest, while the euro has risen against the pound.

    [USD, JPY]
    USD-JPY dropped 0.5% in pegging a six-week low at 104.00. Today racks up as the sixth straight trading day of decline, making this week the third consecutive week of decline. Yen crosses have also fallen, driven by safe haven demand for the Japanese currency amid sharp drop in global equity markets and commodity prices. Concerns about the approaching U.S. election, an outlook of tapering fiscal stimulus, and a surge in new coronavirus cases across Europe, which although still not being corresponded to with illness, hospitalisations and mortality, is nonetheless prompting panicky governments into implementing new restrictions. The pan-Europe STOXX 600 equity index was showing a 2.8% loss, as of the late morning in London, while the S&P 500 mini was showing a 1.6% decline. So far, this could be considered a mini-replay of the market dynamics that were seen during the early phase of the global lockdowns. The Japanese currency 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 came under pressure in London trading. Cable was showing over 0.5% decline in hitting a six-day low at 1.2845, having sharply reversed out of intraday gains. The pair's recent two-month low is at 1.2763. EUR-GBP concurrently popped higher, while GBP-JPY racked up losses of nearly 1%, with the yen outperforming on a safe have bid. The pound was a notable underperformer during the acute risk-off phase earlier in the year due to the mix of the UK being an exposed, open economy with a large current account deficit, and a similar line of reasoning is appearing in some market narratives now, with global stock markets dropping as rich valuations clash with the evolving new reality of Covid-related lockdowns and uncertainty about the U.S., along with a diminishing outlook for fiscal stimulus. In the UK, coronavirus cases and corona-panic are surging. Localised lockdowns are now affecting 10 million people in the UK, and the government is set to announce further restrictions, including the possibility of a another full national lockdown (although that level of response is looking unlikely at this stage). This is a negative backdrop for the pound as it combines with the uncertainty surrounding the Brexit endgame, and with the minutes from the BoE MPC meeting last week affirming that the central bank is at full steam on contingency planning for negative interest rates (along with stressing that it is not ready to do so yet). Regarding Brexit, there is a view that PM Johnson has no intention of leaving the UK out of the EU's single market without a deal and reneging on the Withdrawal Agreement, given the significant economic and political damage it would entail. This view has been, at least up until now, preventing the pound from seeing more extensive losses. We are inclined to agree with it, though it should be remembered that Johnson's cabinet is packed with Brexit ideologues, and the EU is simply not likely to accept the unilateral overwriting of the Withdrawal Agreement. The Brexit matter will be resolved by heads of state in the run-in to the EU's summit on October 15th-16th.

    [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 rallied to a four-day high at 1.3240, facilitated by a rebound in the U.S. dollar and a sharp drop in oil and other commodity prices, which weighed on the Canadian currency. Front-month WTI crude futures were showing a loss of 2.2% as of the early afternoon session in London, earlier posting a four-day low at $40.16. Re-restrictions in Europe amid a surge in positive coronavirus test results, along with uncertainties into the November U.S. elections (which will have major implications on the course of U.S. fiscal policy, among other policy biases), have been generating a more cautious net mindset among market participants. And while participants are seeing discordance in sky-high equity market valuations, particularly in the U.S., relative to evolving realities, they are also seeing some discordance in oil prices relative to the deteriorating outlook for demand, especially with news of a potential return to production of major oil producing facilities in Libya. The bearing down of another tropical storm on the Gulf of Mexico, which has for the third time this seasons caused the idling of facilities in the region, hasn't stopped oil prices from falling today. In sum, USD-CAD looks set for further gains, though shorting CAD-JPY would look the better route for those bearish on the Canadian dollar.

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