XE Market Analysis: Asia - Jan 04, 2021

The Dollar headed modestly higher in N.Y. on Monday, seeing the DXY recover from fresh 33-month lows of 89.42 to a high of 89.92. A sharp bout of risk-off supported the USD, as Wall Street started the year with sharp losses, driven by profit taking from record highs, spiking Covid cases, and angst ahead of Tuesday's Senate run-off elections in Georgia. Data was light, though saw a bounce in the December Markit manufacturing PMI, and a solid November construction spending report, which were mildly supportive of the Greenback as well.

[EUR, USD]
EUR-USD took a stab at new trend highs, though again came up slightly short of the December 30 high of 1.2310. It appears to be just a matter of time before the level is broken, as the Dollar remains under broad pressure. Option backed selling over 1.2300 has been reported, which for now has capped the upside. But-stops are expected to figure in moves over 1.2310 now.

[USD, JPY]
USD-JPY rallied to 103.25, up from London 10-month lows of 102.72. Risk-off conditions this morning have supported the USD broadly, as Wall Street starts the year lower on profit taking from last week's record highs. We suspect though, that periods of USD strength will be brief for the foreseeable future, as investors are expected to rotate out of highly priced U.S. assets, and into relatively cheaper assets around the globe. As Covid vaccines are distributed, and as economies reopen, profit opportunities will open up outside the U.S.

[GBP, USD]
Cable fell from 32-month highs of 1.3704 to 1.3542 lows after the London close. We anticipate that Cable will remain underpinned, though the pound may concurrently maintain a flat-to-weakening bias against the euro. The UK's terms of trade with the EU have eroded in the post-Brexit world, despite the deal, and the key financial services sector is in a strategically more precarious position than before, with participation in EU markets dependent on the latter's equivalency rules, although London's marked natural advantage in this area should protect the sector over the near- to-medium term. This said, there is potential for pent up business investment, with Brexit uncertainty having finally dissipated, while the UK is ahead of the pack in rolling out a Covid vaccination program.

[USD, CHF]
The SNB maintained policy settings in December and reaffirmed once again that it will use direct intervention on currency markets to keep a lid on the "highly valued" currency, despite the fact that the U.S. now official labels Switzerland as currency manipulator. There was no real surprise in the statement, with the central bank highlighting that Covid-19 is "continuing to have a strong adverse effect on the economy". The bank expects consumer prices to fall sharply this year and to stay around zero over the next two years, also thanks to a strong CHF. To start the year, EUR-CHF pulled back under the 1.0800 level, which had provided good support for much of December. Sharp risk-off conditions in U.S. trade saw the CHF firm up.

[USD, CAD]
USD-CAD printed trend lows of 1.2666 in London morning trade, levels last seen in mid-April 2018. Firmer oil prices, along with general risk-on conditions, and a broadly weaker USD supported the CAD early in the session, though a bout of risk-off later supported the USD, taking USD-CAD to 1.2798 highs. More of the same can be expected this year, as the USD is expected to remain under pressure, as capital flows out of the U.S. and into assets priced much more cheaply than in the U.S. The rollout of Covid vaccines will see global economies open up, and likely thrive as pent-up demand steps in.