XE Market Analysis: Europe - Sep 24, 2020

The dollar is up for a fourth consecutive day, and the yen also gained in lockstep versus other currencie. The biggest losers were the dollar bloc and other commodity-correlating currencies, along with many developing world currencies, in what is a classic risk-off positioning pattern. Global stock markets and commodity prices tumbled again, with yesterday's rebound proving to be short lived. Incoming September data, including out of the U.S. and Europe yesterday, has been highlighting vulnerabilities in the service sectors in many countries, especially in Europe, as a consequence of Covid restrictions and lockdown measures. Two Fed members, Clairda and Mester, described the U.S. economy as being in a "deep hole," while the lack of another fiscal support program from a preoccupied Congress, along with anxieties about the upcoming U.S. elections, have also been stirring the concerns of investors. Against this backdrop, the USD index (DXY) posted a fresh eight-week high at 94.42, which corresponded with EUR-USD making an eight-week low at 1.1645. Cable also fell, though remained above yesterday's two-month low at 1.2674. The Australian dollar posted a two-month low at 0.7029 against the U.S. dollar, which is the culmination of a decline of just over 4% in less than a week. Weakening iron ore prices (Australia's principal export) and cementing expectations for the RBA to cut rates as soon as the October 5th policy review, have been weighing. USD-CAD pegged a new seven-week high at 1.3412. Oil prices have been choppy in recent sessions, but remain down by 4%, give or take, on levels seen at the end of last week. One development of note is that Belgium has loosened Covid restrictions, markedly bucking the trend in Europe. The government there will no longer rely on new cases to make policy, either, but rather the rate of hospitalisations. Clearly the reason is the marked lack of correspondence between ballooning new cases and an actual public health event in Belgium, which has been seeing daily Covid deaths range between zero and no more than seven since beginning of September. More countries could follow Belgium's lead, assuming that Covid illness/mortality numbers remain low.

[EUR, USD]
EUR-USD making an eight-week low at 1.1645, and EUR-JPY also declined, reflecting broad safe haven demand for the dollar and yen. Global stock markets and commodity prices tumbled again, with yesterday's rebound proving to be short lived. Incoming September data, including out of the U.S. and Europe yesterday, has been highlighting vulnerabilities in the service sectors in many countries, especially in Europe, as a consequence of Covid restrictions and lockdown measures. Two Fed members, Clairda and Mester, described the U.S. economy as being in a "deep hole," while the lack of another fiscal support program from a preoccupied Congress, along with anxieties about the upcoming U.S. elections, have also been stirring the concerns of investors. Against this backdrop, the USD index (DXY) posted a fresh eight-week high at 94.42. One development of note is that Belgium has loosened Covid restrictions, markedly bucking the trend in Europe. The government there will no longer rely on new cases to make policy, either, but rather the rate of hospitalisations. Clearly the reason is the marked lack of correspondence between ballooning new cases and an actual public health event in Belgium, and across Europe. In Belgium, daily Covid deaths have been ranging between zero and no more than seven since beginning of September. More countries could follow Belgium's lead, assuming that Covid illness/mortality numbers remain low. This could potentially be a positive for the euro.

[USD, JPY]
The yen has been trading in lockstep with the dollar in rising against most other currencies. Both have been seeing safe haven demand as global stock markets tumble. USD-JPY has been holding steady in a narrow range in the low 105.00s, though most yen crosses have traded lower. AUD-JPY, for instance, has dropped by over 0.5% in making an 11-week low at 74.00. In Japan this week, BoJ Governor Kuroda stressed that the Fed's recent policy regime change is similar to the stance the Japanese central bank took in 2016, which he described as an overshooting strategy. He said that the BoJ won't hesitate to take additional easing steps if necessary. Evidently, with core CPI at negative y/y rates, the BoJ has had little success in driving inflation higher. 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 is softer today, though has remained above yesterday's two-month low at 1.2674. The pound yesterday rebounded on news that the UK government is planning to extend, most likely in a modified form, its wage support scheme, which is due to expire next month, and which will be part of a wider emergency support package to help businesses through the new era of Covid restrictions that were announced on Wednesday, and which may last for six months. The reports inspired market participants to trim pound shorts. UK PM Johnson announced new national restrictions this week, which overall weren't as severe as many had been expecting, though will maintain the pressure on the aviation and hospitality sectors in particular. Aside from the national restrictions, localised lockdowns are now affecting 15 million people in the UK. The rate of positive coronavirus test results has continued to surge in the UK, as has been happening across Europe, and although there remains a marked discordance between positive tests an actually hospitalisations/mortality, even allowing for the necessary time lag, the government is a better safe than sorry strategy. Hopes for a vaccine remain buoyant, with data from leading candidate vaccines in late-stage trials due to come in as soon as next month. Regarding Brexit, matter will be resolved by heads of state in the run-in to the EU's summit on October 15th-16th.

[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 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 pegged a new seven-week high at 1.3415. Oil prices have been choppy in recent sessions, but remain down by 4%, give or take, on levels seen at the end of last week. The renewed Covid restrictioning trend 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), lack of new fiscal support package in the U.S., have been generating a more cautious overall mindset among market participants. Markets are seeing some discordance in oil prices relative to the deteriorating outlook for demand, especially with news of a potential return to production of major oil producing facilities in Libya. In sum, USD-CAD looks set for further gains.