XE Market Analysis: Europe - Oct 01, 2020

The dollar and yen are back in the underperforming lane, with both currencies once again correlating inversely with global stock market direction. The USD index (DXY) is down for a fourth consecutive day in posting a nine-day low at 93.64, while EUR-USD lifted to a high so far at 1.1754, which is 2 pips shy of yesterday's nine-day peak. The commodity-correlating dollar bloc currencies, and many developing world currencies have also risen against the dollar and yen. AUD-USD, for instance, posted a nine-day high at 0.7197. USD-JPY plied a narrow range around 105.50, while EUR-JPY lifted above 124.00 and AUD-JPY rallied by over 0.5% in printing a 10-day high at 75.94. The pound traded mixed, rising moderately against the dollar, holding steady versus the yen while losing ground to the Australian dollar, among other currencies. Market participants are waiting on developments from what is the final week of formal future relationship negotiations between the EU and UK. A variety of factors helped support equities, including hopes for a last-ditch effort for fiscal stimulus in the U.S., stronger than expected U.S. data yesterday, and positive news on a vaccine. Those helped offset jangled nervous after a raucous U.S. presidential debate Tuesday night added to election anxieties about a contested election. Data out of Asia today focused on the Japan manufacturing PMI and Tankan surveys, which both suggested an improvement in sentiment, although the PMI headline, at 47.7, shows that the manufacturing sector remains in contraction. Note that Chinese and South Korean markets were closed, while a systems glitch on the Tokyo Stock Exchange disrupted regional equity trading. Ahead today are final September manufacturing PMI readings out of Europe, along with the U.S. ISM manufacturing survey and weekly jobless claims.

[EUR, USD]
EUR-USD lifted to a nine-day high at 1.1758. EUR-JPY also gained, with both the dollar and yen softening amid a backdrop of rallying global stock markets. The euro concurrently lost ground to the Australian dollar, and other currencies, while holding steady versus the pound and some other peers. A variety of factors helped support equities, including hopes for a last-ditch effort for fiscal stimulus in the U.S., stronger than expected U.S. data yesterday, and positive news on a vaccine. Those helped offset jangled nervous after a raucous U.S. presidential debate Tuesday night added to election anxieties about a contested election. We are wary of the euro. The EU recovery fund is likely to be delayed just as nearly all European countries ratcheting up Covid restrictions. And this comes amid the ECB campaign of verbal intervention to keep a lid on the euro. Similar messaging from other central banks, including the BoE and RBA, has also contributed to an overall weakening in the strongly bearish dollar bias that forex market participants had until recently. The rhetorical interjections countervail the impact of the Fed's regime shift to a lower-for-longer stance on interest rates. In Europe, positive Covid tests results have continued to soar in most countries (no lockdown, no facemask Sweden being the remarkable exception). 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 limit upside scope of the euro.

[USD, JPY]
USD-JPY plied a narrow range around 105.50, while EUR-JPY lifted above 124.00 and AUD-JPY rallied by over 0.5% in printing a 10-day high at 75.94. Most other yen crosses also rose, reflecting risk-on positioning theme in global markets, to which the Japanese currency is apt to weaken in such circumstances. 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.

[GBP, USD]
The pound has continued see a mixed performance, rising moderately against the dollar, holding steady versus the yen while losing ground to the Australian dollar, among other currencies. Market participants are waiting on developments from what is the final week of formal future relationship negotiations between the EU and UK. Encouraging signs about trade negotiations have given the pound an underpinning. What's clear is the Boris Johnson's political high jinks hasn't thrown a bigger of a wrench into the negotiating works as had been feared by some. The proposed and controversial Internal Market Bill 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 has now reduced compared to how the situation was looking a few weeks back. 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 input prices to spike, as highlighted by the prelim UK September PMI surveys, which in turn was linked 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 shorting of the pound, in turn adding upward pressure on input prices, and so on.

[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 ebbed to a 10-day low at 1.3277, extending the correction from yesterday's two-month high at 1.3421. An outbreak in risk appetite, which has boosted global stock markets and commodity prices, has both seen the dollar weaken while support the Canadian dollar. Oil prices retraced most of the near 5% plummet that was seen on Tuesday.