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By XE Market Analysis September 23, 2020 7:13 am
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    XE Market Analysis: North America - Sep 23, 2020

    The dollar pulled back a little after posting fresh highs. This saw EUR-USD lift back above 1.1700 after earlier posting fell to an eight-week low at 1.1673. A strong rebound in global stock markets is putting pressure back on the dollar and giving EUR-USD buoyancy, although with the ECB having engaged in a form of verbal intervention and with many European nations implementing the tightest restrictions since the March-April lockdowns amid a surge in positive coronavirus test results across the region, upside potential for EUR-USD may be limited. Weakness in preliminary September PMI surveys out of Europe underscored the downside risks facing the European economy, though coronavirus vaccine hopes have boosted stock markets. Some market commentators highlighted a note from UBS Asset Management, which concluded that there is likely to be emergency approval of up to three vaccines in Q4. Cable lifted back above 1.2700 after earlier hitting a two-month low at 1.2681, which marked a 6% decline from the high seen in early September. The pound also saw moderate declines versus the euro and yen, among other currencies amid a bearish mix of new Covid restrictions in the UK and Brexit endgame uncertainties. According to the FR, the UK government is at least considering an extension in the wage support scheme, which is due to expire at the end of next month. The Australian dollar dropped quite sharply as expectations for the RBA to cut rates again cemented. Westpac analysts are now expecting an easing at the October-6th RBA policy review, while a NAB is calling for a rate cut at either the October or November meetings. AUD-USD dove 0.6% in posting a six-week low at 0.7113, extending losses from last week's highs around 0.7350. AUD-JPY fell by 0.7%, foraying further into 10-week low terrain. Elsewhere, USD-JPY edged above 105.00, though subsequently ebbed back, while USD-CAD remained buoyant after pegging a six-week high yesterday at 1.3347.

    [EUR, USD]
    EUR-USD printed a seven-week low at 1.1720. The prevailing bias looks likely to remain bearish: Market participants have on net re-discovered the dollar's safe haven credentials (U.S. Treasuries remaining the biggest, most liquid packing place in the world), the ECB has engaged in form of verbal intervention and, more importantly, many European nations are implementing the tightest restrictions since the March-April lockdowns amid a surge in positive test results for the coronavirus. In addition to the situation in Europe, there is deadlock in the U.S. Congress over the size and shape of a new fiscal support bill, uncertainty about the upcoming U.S. election, still deteriorating relations between the West and China, and equity markets amid a rapid adjusting process vis-a-vis over-rich valuations relative to evolving realities. A big focus should now be on the coronavirus situation, especially in Europe. The results of phase-3 trials in many leading candidate vaccinations will be coming in over the next couple of months. At the same time, proponents of herd immunity may yet be proved right, and within several months from now. The herd immunity camp (much diminished and derided in most media platforms on the grounds of being irresponsible), have been arguing that incoming data -- specifically the discordance between rising cases and low level incidence of illness and mortality (allowing for a three-week lag) -- are showing a much higher level of population immunity than is generally being assumed. Good news from the vaccine front, and/or confirmation of the herd immunity hypothesis, would be a massive tonic for global markets, which would likely translate to higher EUR-USD levels. For now, though, the prevailing bias is to the downside.

    [USD, JPY]
    The yen has been trading mixed so far today. USD-JPY edged above 105.00, though has since ebbed back, while EUR-JPY is showing net gains while AUD-JPY fell by over 0.7%, foraying further into 10-week low terrain, as expectations for another RBA rate cut cement in markets, which has been concomitant with recent declines in iron ore and other commodity prices. In Japan today, BoJ Governor Kuroda stressed that the Fed's recent policy regime change is similar to the stance the Japanese central bank took in 2016, which he described as an overshooting strategy. He said that the BoJ won't hesitate to take additional easing steps if necessary. Evidently, with core CPI at negative y/y rates, the BoJ has had little success in driving inflation higher. 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]
    Cable lifted back above 1.2700 after earlier hitting a two-month low at 1.2681, which marked a 6% decline from the high seen in early September. The pound also saw moderate declines versus the euro and yen, among other currencies (outside the case against the Australian dollar), amid a bearish mix of new Covid restrictions in the UK, the upcoming expiry of the government's wage support scheme (breaking news is that the government is considering an extension, according to the FT), and Brexit endgame uncertainties. UK PM Johnson announced new national restrictions yesterday, which overall weren't as severe as many had been expecting, though will maintain the pressure on the aviation and hospitality sectors. He also said is should be expected that the restrictions will remain in place for six months. Aside from the national restrictions, localised lockdowns are now affecting 15 million people in the UK. The rate of positive coronavirus test results has continued to surge in the UK, as has been happening across Europe, though there remains a marked discordance between positive tests an actually hospitalisations/mortality, even allowing for the necessary time lag. Hopes for a vaccine remain buoyant, with leading candidate vaccines in late-stage data on trials due to come in as soon as next month. This is a negative backdrop for the pound as it combines with the uncertainty surrounding the Brexit endgame. The Brexit matter will be resolved by heads of state in the run-in to the EU's summit on October 15th-16th. We expect the pound's bias to remain to the downside.

    [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 remained buoyant after pegging a six-week high yesterday at 1.3347. The pair is up by 2.7% from the low that was seen on September 1 just under 1.3000. A generally firmer U.S. dollar and soft oil prices have been supporting in recent days. While crude prices have settled above recent lows, they remain down by over 4% on the week. The re-restrictioning trend in Europe amid a surge in positive coronavirus test results there, 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 overall mindset among market participants. Markets are 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. 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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