XE Market Analysis: North America - Sep 30, 2020

The dollar and yen picked up some safe haven demand during pre-London trading in Asia, though not before printing fresh lows against many currencies in pre-London trading in Asia. Month- and quarter-end factors contributed to some positional chop in currencies and other markets. Stock markets tumbled in Europe before paring losses. S&P 500 E-minis also pared the worse of overnight declines, lifting to a net decline of 0.4% after showing a 1% loss at the lows. In currencies, EUR-USD dipped below 1.1700, extending the pullback from the eight-day high that was seen ahead of the London interbank open at 1.1755. EUR-JPY also declined, posting a low so far at 123.60 after earlier seeing a 12-day peak at 124.26. The euro is also lower against other currencies, albeit more moderately so. Aside from the dollar and yen dynamic, the common currency was affected by German Chancellor Merkel warning that a delay in the EU recovery fund looks "increasingly likely," which is bad timing with nearly all European countries ratcheting up Covid restrictions. This offset better than expected German retail sales and unemployment data. USD-JPY ebbed back to levels around 105.50 after pegging a 15-day high at 105.81. Yen crosses also dropped, for the most party, though AUD-JPY retraced declines. The pound tracked lower before pairing some of its losses. Markets overlooked the slightly less horrendous than expected third-release UK Q2 GDP data, which was revised to -19.8% q/q and -21.5% y/y. Cable printed a two-day low at 1.2809, extending the correction from Monday's high at 1.2927, subsequently lifting back to levels around 1.2850. USD-CAD edged fractionally above recent highs in posting a near two-month high at 1.3421 before slipping back under 1.3400.

[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 ebbed back to levels around 105.50 after pegging a 15-day high at 105.81. Yen crosses also dropped as the yen picked up safe haven demand as global stocks turned lower. The first U.S. presidential debate ahead of the November elections raised some concerns about the integrity of the elections, and the possibility that it might be contested, which spooked investors. Above forecast official PMI manufacturing and non-manufacturing data out of China helped lift Chinese and Asian stock markets, but sentiment remained cautious. While China's CSX 300 and South Korea's KOPSI lifted, Japan's Nikkei 225 finished with a 1.5% loss, and Australia's ASX 200 index with 2.4% decline. The S&P 500 mini was showing a 1% decline in overnight trading, pointing to steep opening losses on Wall Street later. A flurry of end-of-month data releases out of Japan had little impact on the yen, though including above-forecast industrial production and retail sales figures. We remain bullish on the yen, anticipating persisting risk aversion in global markets due to renewed Covid restrictions in Europe, uncertainty about another fiscal support package in the U.S. and uncertainty about the upcoming U.S. election, including the risk of the election being contested. Amid this will come the Brexit endgame, which we see as a wildcard event, given the brinkmanship being employed by UK PM Johnson, although we expect the two sides to reach accord on a future-relationship deal.

[GBP, USD]
The pound has tracked lower today, with markets overlooking the slightly less horrendous than expected third-release UK Q2 GDP data. Cable printed a two-day low at 1.2809, extending the correction from Monday's high at 1.2927. Encouraging signs about EU and UK trade negotiations had underpinned sterling earlier in the week. What's clear is the Boris Johnson's political high jinks hasn't thrown a wrench in the negotiating works as had been feared by some. The proposed Internal Market Bill, which would give the UK government to power to unilaterally overrule parts of the EU Withdrawal Agreement, would only become relevant in a no-deal scenario. What remains unclear is how extensive a deal the two sides may come up with, assuming that the no-deal risk is now much reduced compared to how the situation was looking a few weeks back. There is of course potential for the pound to rally on any fresh signs of the two sides coming to an accordance. But, even with a trade deal in place, the UK will leave the EU's single market at year end and experience a drop in its terms of trade. A deal, unless a broad an comprehensive one (which looks unlikely), won't come near to replicating the terms the UK has currently, and the country will lose much of the benefit from the 40 trade agreements the EU has with global economies. While the UK has already struck a deal with Japan, it will likely take years to match/improve on the terms of trade afforded by the EU's single market. 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. There is also a potentially self-fulfilling mechanism at play, with exchange rate weakness causing spikes in input prices, as highlighted by the prelim UK September PMI surveys, which in turn linked them to downsizing employment numbers. This matters given the high import component of UK exports. Once sufficiently recognized by market participants, this would lead to further shoring of the pound, in turn adding upward pressure on input prices, and so on. Overall, while there is scope for nearer-term rebounds, we retain a bearish medium- to longer-term view of the pound.

[USD, CHF]
EUR-CHF has lifted above 1.0800 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.

[USD, CAD]
USD-CAD edged fractionally above recent highs in posting a near two-month high at 1.3421. The Canadian dollar and other commodity-correlating currencies, are likely to remain on declining path given the uncertainties about the U.S. election and fiscal policy, and new Covid restrictions in Europe. Oil prices plummeted yesterday, by nearly 5%, as a consequence of this backdrop. We remain bullish on USD-CAD.