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By XE Market Analysis September 25, 2020 7:46 am
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    XE Market Analysis: North America - Sep 25, 2020

    The dollar rose during the European morning, though remained below highs seen yesterday against most currencies. This occurred against a backdrop of steepening stock market losses in Europe, as rich valuations clash with evolving realities as Covid cases surge, along with associated restrictions and localized lockdowns. The pan-Europe STOXX 600 equity index dropped over 1% in posting lows not seen since the beginning of June. EUR-USD ebbed back under 1.1650 but has so far remained above the two-month low that was seen yesterday at 1.1626. The euro also weakened against other non-European currencies, including the yen and even the dollar bloc currencies. USD-JPY edged out a 10-day high at 105.56, superseding yesterday's peak by a couple of pips, before ebbing back moderately. The dollar has been underpinned by safe haven demand, despite domestic uncertainties about another fiscal support package and the upcoming elections. Real T-note yields have also been climbing, albeit moderately, from the lows seen in late August, which is something that some market commentaries have picked up on. Elsewhere, Cable dropped quite sharply, to a low at 1.2697 from levels above 1.2600. The pound also declined against other currencies, including the dollar bloc units. The bullish case for sterling, that it is fundamentally undervalued, which is hinged on the EU and UK striking a reasonably comprehensive trade deal next month, remains a weak one under prevailing circumstances and risks. There is a palpable risk that only a bare bones deal will reached, and a possibility that the UK will leave the single market at year-end with no deal at all. The surge in new Covid cases in the UK and Europe is in the mix. New national restrictions are in force in the UK, and localised lockdowns currently affect 15 mln people. The modified wage support scheme has been some relief, though it is more frugal and targetted than the furlough scheme, which expires next month. The UK Chancellor warned that it will not stem rising unemployment in the UK, and bluntly warned the country faces a winter of business failures due to the impact of Covid restrictions.

    [EUR, USD]
    EUR-USD has remained heavy, ebbing back under 1.1650 but remaining above the two-month low that was seen yesterday at 1.1626. The dollar has recently been underpinned by safe haven demand following steep declines across global equity markets. Real T-note yields have also been climbing, albeit moderately, from the lows seen in late August. Focus is on Capitol Hill in the U.S. and progress for a new fiscal support package. Democrats are working on a $2.2 tln package that could be voted on in the House of Reps next week, with the party saying they are ready to negotiate with the White House. The November U.S elections is also a major focus, the net outcome (House, Senate and Presidency) will have major implications for fiscal policy. In Europe, meanwhile, new restrictions across the region have been seen amid a surge in positive Covid tests. There remains a marked discordance between positive tests and hospital admissions and death, and while hospitalisations have been ticking higher, they remain at a fraction of the levels seen in March/April. The Belgium government on Wednesday announced it was no longer using PCR testing (the dominant form in Covid testing) to gauge the prevalence of Covid, and will be focusing on hospitalisations instead, while also bucking the trend in Europe by announcing a reduction in restrictions. False positives are a know problem in PCR testing, especially when testing programs are ramped higher. If hospital admissions and deaths remain markedly disproportionate to new cases, other nations may start to throttle back on restrictions, which would be a bullish scenario for global markets and the euro. The rate of hospital admissions, and the ratio of Covid-caused deaths relative to flu, will be key metrics to monitor over the coming months.

    [USD, JPY]
    USD-JPY edged out a 10-day high at 105.56, superseding yesterday's peak by a couple of pips, before ebbing back moderately. Yen crosses were steady. AUD-JPY plied a narrow range after dropping every day last week and every day this week through to yesterday. The cross, widely seen as a barometer of global investor risk appetite, settled around 74.50, up from the three-month low that was seen yesterday at 73.96. Global stock markets remain whippy, mostly gaining in Asia today after Wall Street managed a positive close, which helped lift AUD-JPY out of its lows, but sentiment is uncertain. Focus is on Capitol Hill in the U.S. and progress for a new fiscal support package. Democrats are working on a $2.2 tln package that could be voted on in the House of Reps next week, with the party saying they are ready to negotiate with the White House. New restrictions across Europe amid a surge in positive Covid tests has also been inspiring caution at a global level. But, so far there has been a market discordance between positive tests and hospital admissions and deaths. The Belgium government on Wednesday announced it was no longer using PCR testing to gauge the prevalence of Covid, and will be focusing on hospitalisations instead, while also bucking the trend in Europe by announcing a reduction in restrictions. False positives are a know problem in PCR testing (the dominant form in Covid testing), especially when testing programs are ramped higher. If hospital admissions and deaths remain markedly disproportionate to new cases, other nations may start to throttle back on restrictions. This would be bullish scenario for global markets. 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 dropped back to the mid 1.2700s after rallying to a three-day high at 1.2806. EUR-GBP concurrently lifted as Cable dipped, though the cross remains net lower on the day. The bullish case for sterling, that it is fundamentally undervalued, and is hinged on the EU and UK striking a reasonably comprehensive trade deal next month, remains a weak one under prevailing circumstances and risks. There is a palpable risk that only a bare bones deal will reached by the EU and UK, and a possibility that the UK will leave the single market at year-end with no deal at all. In either of these scenarios, negotiations would continue next year, so the matter won't be closed, but the near- to medium-term impact on the UK could be significant. There is a view that PM Johnson has no intention of leading the UK out of the EU's single market without a deal and reneging on the Withdrawal Agreement, given the significant economic and political cost 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 loaded with Brexit ideologues, and the EU is not likely to accept the unilateral overwriting of the Withdrawal Agreement. The controversial Internal Market Bill (which proposes legislation that overwrites parts of the Withdrawal Agreement) remains in process in the UK's parliament, and passage through the House of Lords remains a potential obstacle. Aside from Brexit, there a surge in new Covid cases and the associated new restrictions and localised lockdowns (which currently affect 15 mln people). The modified wage support scheme has been a relief, though is much more frugal and targetted than the furlough scheme, which expires next month. The Chancellor, Rishi Sunak, warned that it will not stem rising unemployment in the UK, and warned the country faces a winter of business failures due to the impact of Covid restrictions.

    [USD, CHF]
    EUR-CHF has lifted back above 1.0800. The SNB yesterday repeated, after its quarterly monetary policy review, that the franc remains "highly valued" and said the bank is ready to "intervene more strongly in the foreign exchange market". 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 sharply 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 corrected to the mid 1.3300s after pegging a seven-week high at 1.3419 yesterday. The U.S. dollar has softened against most currencies, while oil prices have lifted moderately, paring losses seen over the last week. Directional risks remain to the upside. New Covid restrictions 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), an continued lack of a new fiscal support package in the U.S., have been generating a more cautious overall mindset among market participants.

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