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By XE Market Analysis September 29, 2020 7:50 am
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    XE Market Analysis: North America - Sep 29, 2020

    The dollar and yen have continued to soften, especially the latter, even though global stock market rally has once again flagged. EUR-USD posted a six-day high at 1.1699, extending the rebound from the two-month low that was seen last Friday at 1.1612, and EUR-JPY lifted to an eight-day peak at 123.54. The euro itself did find a measure of support from an above-forecast Eurozone ESI economic confidence survey. USD-JPY lifted to a two-week high at 105.74. AUD-JPY rose into six-day high terrain, while AUD-USD also gained. The Aussie dollar has been rising concomitantly with and abatement in RBA easing expectations. The Oct ASX 30-day interbank cash rate futures closed in Sydney at 99.880, indicating a 64% expectation for the RBA to cut the official cash rate by 25 bp to 0.00% at the upcoming board meeting on October 6. This is down from the 77% implied odds that was seen last week. Cable and GBP-JPY gain, though the pound lost some ground to the euro. The pound outperformed yesterday on encouraging signs about EU and UK trade negotiations, which comes with the final week of talks having commenced in Brussels. The London Times reported that the EU has dropped its demand for a broad agreement to be reached on all outstanding areas of dispute (fishing rights and state aid) before drafting a final agreement, and in a significant sign of progress, that this week's talks will include extra sessions that will focus on the sticking points. What's clear is the Boris Johnson's political high jinks (introducing proposed legislation that would allow the UK government to unilaterally overwrite parts of the EU Withdrawal Agreement) hasn't thrown a wrench in the negotiating works as had been feared. What remains unclear is how extensive a deal the two sides will come up with, assuming that the no-deal risk is now much reduced.

    [EUR, USD]
    EUR-USD posted a six-day high at 1.1699, extending the rebound from the two-month low that was seen last Friday at 1.1612, and EUR-JPY lifted to an eight-day peak at 123.54. The moves reflect a broad ebb in the dollar and yen, even though the pickup on global stock markets has flagged. The euro itself did find a measure of support from an above-forecast Eurozone ESI economic confidence survey. ECB policymakers' ongoing verbal intervention, which is aiming to soften the euro, has evidently been having lessened near-term impact, though, along with similar messaging from other central banks, including the BoE and RBA, has contributed to an overall weakening in the previously strong dollar bearish sentiment that forex market participants had until recently. This rhetorical interjections has countervailed 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 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 (fitting the seasonal pattern for respiratory sickness in this part of the world), still remain at basement 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, which should limited upside scope of the euro.

    [USD, JPY]
    USD-JPY remained settled in the mid 105.00s. EUR-JPY, meanwhile, lifted to an eight-day peak at 123.64, while AUD-JPY rose into six-day high terrain. Other yen crosses have also gained ground, with the Japanese currency, like the dollar, softening against a backdrop of rallying global stock markets. 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. Market participants are managing to look past the impact of Covid, despite the wave of new restrictions across Europe, with a jump in U.S. Q3 GDP data helping, along with news that Florida is removing some Covid related restrictions, where bars and restaurants will be reopening. Cases and mortalities have been trending lower in the U.S., and remain low across Asia. Canada and many European nations are seen sharp spikes in positive Covid test results, but there has not yet been a corresponding rise in hospital admissions and deaths. Some scientists have been tentatively tagging this as a "case-demic", such as was seen in the 2009-10 season in the U.S., when a large testing program for the H1N1 flu, which caused a serious public health impact (sickness and mortality) in the previous winter season, yield huge new cases but a seemingly remarkable lack of corresponding sickness and death. This phenomenon was accounted for by a combination of false positive test results, which becomes greatly amplified in large testing programs, and the a build-up in population immunity. Positive test outcomes may have been caused by those with so-called functional immunity, whereby people are infected a second time, and and thereby test positive, but have immune resilience so that they recovery quickly with either no or only mild symptoms. This alternative hypothesis is being tested now in Europe. If right, presumably this would pave the way for a reversal out of restrictions, which could lead to a strong recovery in risk appetite in global markets, though it will take a lot to convince governments, who are for the most part fully vested in a strategy of virus suppression until a vaccine saves the day.

    [GBP, USD]
    The pound remains buoyant after outperforming yesterday on encouraging signs about EU and UK trade negotiations, which comes with the final week of talks having commenced in Brussels. The London Times reported that the EU has dropped its demand for a broad agreement to be reached on all outstanding areas of dispute (fishing rights and state aid) before drafting a final agreement, and in a significant sign of progress, that this week's talks will include extra sessions that will focus on the sticking points. What's clear is the Boris Johnson's political high jinks (introducing proposed legislation that would allow the UK government to unilaterally overwrite parts of the EU Withdrawal Agreement) hasn't thrown a wrench in the negotiating works as had been feared. What remains unclear is how extensive a deal the two sides will come up with, assuming that the no-deal risk is now much reduced. The UK will leave the EU's single market at year end and experience a drop in its terms of trade. The UK will cease to benefit from the 40 trade agreements the EU has with global economies. The UK has already struck a deal with Japan, but it will likely take years to replicate or improve on the terms of trade afforded by the EU's single market. The trajectory of BoE policy is an issue. BoE MPC member Tenreyro stated yesterday that she has seen "encouraging" evidence on negative interest rates, which was promptly 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 three- to four-week lag should be observed. If the discordance between positive tests and illness/mortality persists, then there would be a chance, at some point, for a policy relaxation.

    [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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