XE Market Analysis: Europe - Sep 17, 2020

EUR-USD edged out a five-day low at 1.1829, extending the retreat from yesterday's 1.1901 six-day peak. Expectations for the Fed to present upward revisions to U.S. economic projections at the conclusion of the FOMC meeting today, along with recent signs that the ECB is concerned about the euro, or at least would be if rising EUR-USD trend resumed, has made the market more cautious. USD-JPY edged out a 19-day low at 105.25, which is the culmination of a three consecutive day run lower from levels above 106.00. EUR-JPY hit a one-week low, and AUD-JPY posted a one-week low before rebounding amid a run of Aussie dollar buying. A sputtering price action across Asian stock markets appeared to catalyse yen buying. Elsewhere, the pound clocked a six-day high against the euro before dropping back to near net unchanged levels. Cable edged modestly higher, to a 1.2915 peak, before ebbing back some, leaving yesterday's six-day high at 1.2927 unchallenged. There seems to be a measure of incredulity in market narratives that the UK government is serious about its threat to leave the EU's single market at year-end without a deal, given the massive near-term disruptive impact it would have on the economy, and given the divisions appearing within the Conservative Party, and among UK nations. Even though the controversial Internal Market Bill sailed through the House of Commons, the proposed legislation is likely to have a tougher time in the House of Lords. There are also expectations that a more practical attitude will be seen in trade negotiations once state leaders become directly involved in the run-in to the October 15th-16th EU summit. This backdrop has lessened the bearish conviction markets have with regard to the pound.

[EUR, USD]
EUR-USD dropped to a five-week low at 1.1737, and EUR-JPY a fresh seven-week low at 123.31. Both move were largely driven by broad dollar and yen gains amid a backdrop of falling stock markets. Markets had run in to yesterday's post-FOMC announcement in risk-on mood, fully anticipating the Fed to underscore its newly codified lower-for-longer policy strategy; the central bank delivered no this, but market participants got a little more than they bargained for as the dot plot marked up rate hikes in the future (which is not unreasonable as, once the pandemic panic passes there is likely to be a global boom given the level of stimulus). This sparked a correction in stock markets. Recent price action has showed that the dollar has returned to correlating inversely with global stock markets, which hadn't been the case during the June-August period, which the U.S. currency was trending firmly lower. ECB policymakers have been signalling its concerned about euro strength, which they deem has partly counterbalanced the easing measures implemented earlier in the year.

[USD, JPY]
USD-JPY has remained heavy, though has so far remained above yesterday's seven-week low at 104.79. EUR-JPY, in contrast, clocked a fresh seven-week low at 123.31, while AUD-JPY hit an eight-day low. The Japanese currency has been in demand as a safe haven. Markets had run in to yesterday's post-FOMC announcement fully anticipating the Fed to underscore its newly codified lower-for-longer policy strategy; the central bank delivered no this, but market participants got a little more than they bargained for as the dot plot marked up rate hikes in the future (which is not unreasonable as, once the pandemic panic passes there is likely to be a global boom given the level of stimulus). This sparked a correction in stock markets, which in turn raised demand for haven assets and currencies, such as the yen. The 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, while losing ground to the dollar and yen, still clocked a one-week high against the euro. UK PM Johnson yesterday made a compromise on his controversial Internal Market Bill, by including an amendment which requires a parliamentary vote in the event that the government wanted to invoke the parts of it that would break international law. The amendment is not likely to placate the EU. UK money markets are discounting the BoE going negative with interest rates in 2021, which is not surprising given the Brexit endgame showdown, and risk of the EU and UK going their separate ways without a trade deal, and with increasing restrictions as new coronavirus cases surge (although hospitalisations and deaths continue to bump along at very low levels).

[USD, CHF]
EUR-CHF has plying a narrow range in familiar levels in the mid 1.0700s. 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 rallied to an eight-day high at 1.3248. Oil prices came off the boil after rallying strongly over the last couple of days, with production in the Gulf of Mexico having been idled due to Hurricane Sally. A risk-off sentiment in global stock and commodity markets was seen in the wake of the Fed's policy announcement yesterday, which met expectations in terms of the central bank underscoring its newly codified lower-for-longer policy strategy, but also surprised with the dot plot marking up rate hikes in the future (which is not unreasonable as, once the pandemic panic passes there is likely to be a global boom given the level of stimulus). This gave the U.S. currency an underpinning.