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By XE Market Analysis September 28, 2020 7:49 am
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    XE Market Analysis: North America - Sep 28, 2020

    The dollar has softened concurrently with rallying global stock markets, losing most ground to the pound, which surged. The yen pared intraday gains as the equity rally picked up momentum during the European morning session. The USD index (DXY) dropped by 0.5% to within a pip of Friday's low at 94.19, while EUR-USD rebounded to a 1.1665 high after earlier pegging a low at 1.1615. Friday's two-month low at 1.1612 was left untroubled. A turn lower in the dollar and a strong rally in EUR-GBP conspired to lift EUR-USD. The EUR-JPY cross also lifted by around 30 pips from the two-month low that was seen earlier. More ECB policymaker remarks expressing concern about euro gains had earlier weighed, though market participants have already recognized the ECB's policy course. As for the pound, Cable rose over 1.3% to best-in-a-week levels above 1.2900, while EUR-GBP dove by over 1% to a three-week low at 0.9029. An FT article reported that there are tentative signs of progress into the final round of form trade talks between the EU and UK. There was also news that the BoE and the ESMA (the EU's securities watchdog) have agreed on information-sharing arrangements necessary for EU banks to continue using clearing houses in London from January. Given the high stakes, market narratives have been showing that participants are also anticipating a pragmatic -- realpolitik -- attitude will be seen in trade negotiations once state leaders become directly involved in the run-in to the October 15th-16th EU summit. In the U.S., focus remains on attempts to reach a resolution on another fiscal support package. The approaching election is also firmly on the radar, as the net outcome (House, Senate and Presidency) will have major implications. In Europe, positive Covid tests results have, for the most part, have continued to soar. Covid hospitalisations and mortality, while bumping higher over the last week in many countries, still remain at a fraction of the March/April peak. The ratio between Covid-caused death and other respiratory disease-caused death also remains low, again contrasting markedly to the March/April situation. Nevertheless, the trend in most countries in Europe is for tighter restrictions and more localized lockdowns.

    [EUR, USD]
    EUR-USD has lifted to levels around 1.1650 after earlier pegging a low at 1.1615. Friday's two-month low at 1.1612 was left untroubled. A turn lower in the dollar and a quite-strong rally in EUR-GBP conspired to lift EUR-USD. The EUR-JPY cross also lifted by around 30 pips from the two-month low that was seen earlier. Fresh ECB policy remarks expressing concern about euro gains had earlier weighed on the common currency, though they're not too surprising, with market participants having already recognized the ECB's policy course. To recap ECB member Visco (Italy): "if downward pressures jeopardise out price stability objective, we'll have to intervene." Policymakers from other central banks, including the BoE, BoJ and RBA have been sounding dovish remarks, with some, like those a the ECB, linking them to exchange rates. This has weakened the previously strong bearish sentiment that market participants had until recently; offsetting the impact of the Fed's regime shift to a lower-for-longer stance on interest rates. In the U.S., focus remains on Congress and its continued attempts to reach a resolution on another pandemic-era fiscal support package. The approaching election is also firmly on the radar, too, as the net outcome (House, Senate and Presidency) will have obviously major implications for fiscal policy. In Europe, positive Covid tests results have, for the most part, have continued to soar. Covid hospitalisations and mortality, while bumping higher over the last week in many countries, still remain at very low levels relative to the March/April peak. The ratio between Covid-caused death and flu- and pneumonia-caused death also remains low, again contrasting markedly to the March/April situation. Nonetheless, the trend in most countries in Europe is for tighter restrictions and more localized lockdowns. Overall, we retain a bearish view of EUR-USD.

    [USD, JPY]
    USD-JPY and yen crosses have softened. More ECB policymaker signalling about the concern of euro valuation elicited EUR-JPY selling, which tipped the cross to a two-month low at 122.38. USD-JPY, meanwhile, gave back most of the gains that were seen on Friday in posting a low at 105.27. AUD-JPY also saw weakness, though managed to subsequently pare most of its decline. In Japan, chief cabinet secretary, Kato, said that there would be no hesitation in bringing forward new stimulus measures if required. South Korea exports up for first time in seven months in September. 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 has picked up some demand, which has seen Cable lifted back above 1.2800 and EUR-GBP drop back under 0.9100. This comes with an FT article reporting that there are tentative signs of progress into the final round of form trade talks between the EU and UK, which will take place in Brussels this week. Don't hold your breadth would be our advice. There remains a palpable risk that only a bare bones trade deal will reached, 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 wouldn'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. 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. BoE MPC member Tenreyro, meanwhile, said that she has seen "encouraging" evidence on negative interest rates, which was subsequently followed by her colleague Ramsden saying that negative rates were not imminent. Another consideration is the increasing level of restrictions in the UK in response to the surge in positive Covid tests. Localised lockdowns now affect 17 mln people in the UK. As with with most other European countries, the surge in positive test outcomes is not being accompanied with anything like a corresponding rise in hospitalisations/mortality, although a 3/4 week lag should be observed. If the discordance between positive tests and illness/mortality persists (the tentative reasons include a false positive test rate combined with rising numbers of tests, alongside a build of much greater population immunity than is being assumed currently (antibody testing only paints part of the picture), then there would be a chance, at some point, for a policy relaxation. Pressure on PM Johnson from his own party, and news that he spoke to the Swedish government's anti-lockdown/anti-facemask scientific advisors, supports this view.

    [USD, CHF]
    EUR-CHF briefly lifted back above 1.0800 last week, before turning lower again. The SNB last week 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 remained buoyant in the mid 1.3300s, but off from last Thursday's seven-week high at 1.3420. Broader U.S. dollar strength and soft oil prices have been underpinning the pair recently, which has rallied from the eight-month that was seen at the beginning of September at 1.2992. We retain a bullish view of the pairing, with surging Covid cases in Europe and Canada yielding new restrictions and localized lockdown measures.

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