XE Market Analysis: North America - Oct 05, 2020

Both the dollar and yen softened, while the dollar bloc outperformed the other main free floating currencies amid a bout of risk-back-on positioning in global markets, fuelled by positive news about U.S. President Trump's health condition. EUR-USD traded firmer, printing a peak at 1.1760, which is 10 pips short of the 13-day high that was seen last Thursday. The pair last week rallied out of levels in the lower 1.1600s amid a backdrop of rising global stock markets, as the rise in risk appetite put a downward influence on the dollar, before news of Trump's Covid infection. The dollar's bear trend -- structured on Fed policy, relative fiscal policies, net outflow of speculative and non-speculative capital -- requires a backdrop of positive risk appetite to function, to draw out capital parked in the safe haven of U.S. Treasuries and seek growth in global economies. USD-JPY lifted to a peak at 105.68, which breached Friday's high by a pip. The biggest mover out of the main currencies has been AUD-JPY, which rallied by about 0.8% in posting a peak at at 75.94. The two-week high seen last Thursday is at 76.07. The pound has continued to trade mixed, as it did last week, with bouts of high volatility on confusing Brexit headlines. EU-UK trade talks have been extended through to the EU summit, which starts on October 15th. Prime Minister Johnson and European Commission President von de Leyen spoke via video call on Saturday. Both maintained encouraging mood music, though Johnson said that while he wants a deal, he could live without one, while von de Leyen said that significant gaps remain on key issues. As for Trump, to make a somewhat cold appraisal, statistically there is about a 95% chance that he will survive, given his age and health profile, and perhaps slightly less in terms of making a recovery back to full health, but it may not be for another week or two before we'll know for sure. New Covid restrictions and lockdowns are starting to be seen in the U.S. as well as Europe, though the latter remains more at risk of economic disruption.

[EUR, USD]
EUR-USD has traded firmer, printing a peak at 1.1760, which is 10 pips short of the 13-day peak that was seen last Thursday. The pair last week rallied out of levels in the lower 1.1600s amid a backdrop of rising global stock markets, as the rise in risk appetite put a downward influence on the dollar, before news of Trump's Covid infection. The dollar's bear trend -- structured on Fed policy, relative fiscal policies, net outflow of speculative and non-speculative capital -- requires a backdrop of positive risk appetite to function, to draw out capital parked in the safe haven of U.S. Treasuries and seek growth in global economies. As for Trump, to make a somewhat cold appraisal, statistically there is about a 95% chance that Trump will survive, given his age and health profile, and perhaps slightly less in terms of making a recovery back to full health, but it may not be for another week or two before we'll know for sure. New Covid restrictions and lockdowns are starting to be seen in the U.S. as well as Europe, though the latter remains more at risk of economic disruption. In the U.S., the political wrangling over a new fiscal relief package remains ongoing, and the chances of a pre-election agreement now look slimmer given Trump's illness. Uncertainties about next month's U.S. election, and about the Brexit endgame, are also on the worry list. The scene is set for volatile markets in the coming weeks. Bigger picture, we are bearish on the dollar. This hinges on the a positive attitude to investment risk returning to global markets, and in a sustained manner, which in turn will need the world to make it through the Covid crisis, either via vaccines, or by learning to live with the new pathogen, like the Swedes do (without lockdowns or facemasks, and with permitted gatherings of up to 50). The longer the incident of severe illness (ICU admissions) and mortality remain at basement levels, as they have been in Europe despite new cases surging for over a month now, the stronger the arguments to follow Sweden's example will be -- at least presumably. The surge in new cases might largely be a function of false positive test results. Populations may also be much nearer to 'endemic equilibrium' than is generally been assumed, too.

[USD, JPY]
The yen has softened and the dollar bloc currencies have firmed amid a risk-back-on positioning theme, driven by encouraging reports about U.S. President Trump's health. USD-JPY lifted to a peak at 105.68, which breached Friday's high by a pip. The biggest mover out of the main currencies has been AUD-JPY, which rallied by about 0.8% in posting a peak at at 75.94. The two-week high seen last Thursday is at 76.07. 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 to trade mixed, as it did last week, and with bouts of high volatility on confusing Brexit headlines. EU-UK trade talks have been extended through to the EU summit, which starts on October 15th. Prime Minister Johnson and European Commission President von de Leyen spoke via video call on Saturday. Both maintained encouraging mood music, though Johnson said that while he wants a deal, he could live without one, while von de Leyen said that significant gaps remain on key issues. We think Johnson's no-deal threat is bluff. The next couple of weeks will be the most intensive phase yet in negotiations -- and decisive with state leaders now fully engaged and given the fast-approaching deadline. Goldman Sachs analysts are calling for a "thin" tariff free, quota free deal, which seems to be the consensus, and we are inclined to agree. The net impact on both the EU and UK terms of trade will be negative, but much more so in the UK's case. On the Covid front, local lockdowns are intensifying in the UK and Europe. We take a bearish medium- to longer-term view of the pound's effective exchange rate. In data, the UK's final September composite PMI beat expectations at 56.5, well up on the preliminary estimate of 55.6, though dropping back from the August's six-year high reading of 59.1. A strong upward revision to the services PMI (to 56.1 from 55.1) more than offset a small downward revision to the manufacturing PMI (to 54.1 from 54.3). Overall, the survey showed that private sector activity is still expanding robustly, but waning notably from the pace of expansion seen in August. Optimism in the dominant services sector for the 12 months ahead fell to its lowest since May, while the volume of new business fell to its lowest since June. Respondents noted concerns that the strong post-lockdown recovery in consumer demand had peaked. Employment numbers continued to decrease, especially in the service sector, mostly due to slumping demand but also due to rising input costs, which were linked to weakness in the pound. Concerns about Covid and Brexit, and uncertainties about the global economic outlook, featured high in survey responses. Given the new restrictions and sharply rising level of localised lockdowns in the UK and across Europe, we should expect a further moderation in the pace of economic expansion.

[USD, CHF]
EUR-CHF has ebbed back under 1.0800 again, reflecting the chronic proclivity for the Swiss currency to rise in nominal terms, from incoming interest and other investment receipts from assets held abroad, alongside the trade surplus. A higher franc drives down inflation, which to a degree offsets any loss in export competitiveness that a nominally firmer currency might otherwise entail, as there is a high import component in Swiss exports. The SNB, however, remains committed to limiting gains in the franc. At its quarterly monetary policy review last month, it stated that the franc remains "highly valued" and said it 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, even though 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 remains below the seven-month peak that was seen in early June at 1.0921.

[USD, CAD]
USD-CAD has posted a two-week low at 1.3262. A 4%-plus rise in oil prices should help keep the Canadian dollar underpinned for now, though markets will be fixated on U.S. President Trump's health over the coming week or so, which will have a wildcard influence on global markets. On Canada's domestic front, rising positive Covid tests are becoming a problem, with restrictions being imposed. The August trade report (up tomorrow) is seen showing a C$2.0 bln deficit from the C$2.5 bln deficit in July. Canada's September employment report (due Friday) has us anticipating a 100.0k headline gain after the 245.8k rise in August, with unemployment seen ebbing to 10.0% from 10.2%.