XE Market Analysis: North America - Sep 07, 2020

Sterling has dropped sharply on reports, initially by the FT, that the UK government is planning to unpick parts of the withdrawal agreement that was signed with the EU in January, including elements of the special arrangements for Northern Ireland that are legally binding. Cable dove by over 1% to 12-day lows under 1.3150, and EUR-GBP rallied by nearly 1% in printing a 12-day high at 0.8960. The pound saw a similar magnitude of declines against other currencies. A government source cited by the Guardian newspaper said that the government's move would likely derail this week's round of trade negotiations with Brussels, while a Downing Street spokesperson downplayed the move as being a "fallback option" in the event a deal can't be reached. State aide, fisheries and governance are the three major sticking points. PM Johnson unilaterally declared October 15th as the deadline to reach agreement with the EU on trade, stating that the UK would "move on" in the event of a no-deal, which would be a "good outcome." This ups the ante -- making the no-deal threat tangible. The dollar and other currencies, meanwhile, have been plying narrow ranges in thin, early-week trading. Aside from Cable, the dollar has remained below the highs seen in the wake of the overall better than expected U.S. August jobs report on Friday. The currency might have rallied more were it not for the Fed having recently codified the lower-for-longer rate protocol, and with Fed Chair Powell having assured that the Fed won't prematurely withdraw support while noting that the recovery will "get harder from here."

[EUR, USD]
EUR-USD has ebbed moderately, to the lower 1.1800s from levels near 1.1850. The near 1% decline in Cable, while driven by a broad rotation lower in the pound, appears to have imparted a degree of downward bias in EUR-USD. The pair remains above its post-U.S. payrolls low at 1.1781. The low was seen in the wake of the overall better than expected U.S. August jobs, and the dollar might have rallied more were it not for the Fed having recently codified the lower-for-longer rate protocol, and with Fed Chair Powell having assured, after the data release, that the Fed won't prematurely withdraw support while noting that the recovery will "get harder from here." The focus now shifts to the ECB meeting on Thursday after bearish members of the governing council recently voiced their concern about uptrend in EUR-USD. While we expect a strengthening in the "lower for longer" message, any hopes of a clear signal of additional easing or even further rate cuts are likely to be disappointed. ECB hawk, Wunsch, warned on Friday that dovish expectations for Thursday's meeting risk overshooting. We expect EUR-USD trading to be two-sided into the ECB council meeting.

[USD, JPY]
USD-JPY has continued to ply a narrow range in the lower-to-mid 106.00s. The 106.00 level roughly marks the midway point of the range that's seen seen over the last month. Most yen crosses have settled after dropping quite sharp amid the Wall Street led tumble in global stock markets, which elicited a degree of safe haven demand for the Japanese currency. In the bigger picture, most yen crosses have been trending higher since May, with the Japanese currency tracking inversely with global stock market direction. 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 a profile of being a low-beta haven currency. With risk appetite among market participants high, fuelled by massive monetary and fiscal stimulus efforts worldwide, the yen has been trending lower (ex USD-JPY). This looks likely to remain the case for now.

[GBP, USD]
The pound has come under pressure amid reports, initially by the FT, that the UK government is planning to unpick parts of the withdrawal agreement that was signed with the EU in January, including elements of the special arrangements for Northern Ireland that are legally binding. A government source cited by the Guardian newspaper said that the move would likely derail this week's round of trade negotiations with Brussels, while a Downing Street spokesperson downplayed the move as being a "fallback option" in the event a deal can't be reached. State aide, fisheries and governance are the three major sticking points. PM Johnson unilaterally declared October 15th as the deadline to reach agreement with the EU on trade, stating that the UK would "move on" in the event of a no-deal, which would be a "good outcome." The deadline was always going to be the EU leaders' summit in October; Johnson was stressing that his government will not be considering any extension in talks. The news on the withdrawal agreement ups the ante -- making the no-deal threat tangible. Johnson's government is attempting to turn a weak negotiating position into a stronger one. Regular negotiations between the respective sides representatives Frost and Barnier are now likely to be rendered useless (if they weren't already); political leaders on both sides of the Channel will be deciding the Brexit endgame. The source cited by the Guardian said that engagement by heads of state has been minimal thus far. The stakes are high for both sides, but higher for the UK than the EU. Leaving the EU's single market at year end, which would mean not only the UK leaving the benefits of the common market but also the 40 global trade agreements the EU, and putting UK trade on less favourable WTO terms would be politically risky for Johnson. But, his party has a strong majority in parliament and he would still have four years left on the electoral clock. A deal of some nature is still the mostly likely outcome, but a bare bones or no-deal scenarios cannot be rule out. Cable dove by over 1% to 12-day lows under 1.3150, and EUR-GBP rallied by nearly 1% in printing a 12-day high at 0.8960. The pound saw a similar magnitude of declines against other currencies. We anticipate a downward bias will prevail for now.

[USD, CHF]
EUR-CHF last week once again failed to sustain gains above the 1.0800 level, returning to familiar levels in the mid 1.0700s. This is a pattern that has been repeating for about six weeks now. Last week the cross spiked sharply, on Tuesday, to a three-month peak at 1.1882. The rally was concomitant with EUR-USD soaring into 28-month high territory above 1.2000. Robust manufacturing data from most key global economies, and global stock market gains may have also helped weaken the low beta, safe haven Swiss franc. 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 lifted back above 1.3100 after closing out on Friday at 1.3061. The pair remains below the 1.3141 high that was seen following the release of the August jobs reports out of both the U.S. and Canada. The U.S. report was better relative to expectations. USD-CAD has put in some distance after posting an eight-month low last Tuesday at 1.2992. The basing in the pair, which has been trending lower since March, coincided with a 10%-plus drop in oil prices last week. The stalling out in the recovery pace of the global economy, large crude stockpiles, and uncertainty about Chinese demand (which has been importing crude in record quantities in recent months, but may now be ready to slow this process down) has weighed on oil. This backdrop should keep USD-CAD on an steady-to-upward bias for now.