XE Market Analysis: North America - Sep 17, 2020

The dollar and yen gained concurrently with tumbling global stocks and commodity prices. EUR-USD consequently dropped to a five-week low at 1.1737 ahead of the European open, subsequently rebounding to the 1.1800 area. USD-JPY printed a seven-week low at 104.68. EUR-JPY also clocked a fresh seven-week nadir at 123.31, while AUD-JPY hit an eight-day low. AUD-USD dove by over 0.6% in making a six-day low at 0.7254. The other dollar bloc currencies also dropped relatively sharply, too, as is to be expected in phases of risk-off positioning. USD-CAD rallied to an eight-day high at 1.3248. The appearance of rate hikes on the Fed's dot plot, albeit well down the road, sparked a correction in stock markets. The pound, while losing ground to the dollar and yen, still clocked a one-week high against the euro. The BoE's MPC announces on policy shortly, where no changes are widely anticipated, accompanied by continued dovish signalling. UK money markets are discounting the BoE going negative with interest rates in 2021, which is not surprising given the Brexit endgame showdown and with increasing restrictions as new coronavirus cases surge (although hospitalisations and deaths continue to bump along at very low levels).

[EUR, USD]
EUR-USD has seen a descent rebound, to a 1.1820 high from the five-week low seen ahead of Europe at 1.1737. The lift reflects a combo of broader euro gains and dollar declines, with the common currency bouncing against the yen, pound, and Aussie dollar, among others. At the same time, the dollar has lost ground to most currencies. There doesn't seem to have been any data or event that may have influenced, while more ECB policymakers have sounded out dovish signals. ECB's Rehn said that inflation has "persistently lingered too low, and there is a risk that this trend will continue". His colleague Guindos, meanwhile, stressed that that the central bank must avoid inflation expectations turning negative, adding that the PEPP program is flexible and can be extended if needed. Bundesbank President Weidmann, in contrast, said that emergency measures must be scaled back as soon as the crisis is over. In the mix is the unexpected appearance of rate hikes, further out, on the Fed's dot plot. Overall, and despite EUR-USD's current upward shift, upside potential looks to limited.

[USD, JPY]
USD-JPY dropped to a seven-week low at 105.03, which is the culmination of a three consecutive day run lower from levels above 106.00. EUR-JPY hit a one-week low, and AUD-JPY posted a one-week low before rebounding amid a run of Aussie dollar buying. A sputtering price action across Asian and European stock markets appeared to catalyse yen buying. 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]
Sterling has been trading mixed, losing ground to the dollar and yen, while clocking a one-week high against the euro. The BoE's MPC announces on policy shortly, where no changes are widely anticipated, accompanied by continued dovish signalling. Cable has settled in the mid 1.2900s after failing to sustain gains above 1.3000 yesterday. EUR-GBP pegged a one-week low at 0.9083. UK PM Johnson yesterday made a compromise on his controversial Internal Market Bill, by including an amendment which requires a parliamentary vote in the event that the government wanted to invoke the parts of it that would break international law. The amendment is not likely to placate the EU. UK money markets are discounting the BoE going negative with interest rates in 2021, which is not surprising given the Brexit endgame showdown, and risk of the EU and UK going their separate ways at year-end without a trade deal, and with increasing restrictions as new coronavirus cases surge (although hospitalisations and deaths continue to bump along at very low levels, and prevailing mortality rate from other contagious respiratory disease, are still higher than cases where Covid is listed on the death certificate).

[USD, CHF]
EUR-CHF has ebbed back to familiar levels in the mid 1.0700s after the latest drop back from forays above the 1.0800 level. 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 by over 130 bln 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 rallied to an eight-day high at 1.3248. Oil prices came off the boil after rallying strongly over the last couple of days, with production in the Gulf of Mexico having been idled due to Hurricane Sally. A risk-off sentiment in global stock and commodity markets was seen in the wake of the Fed's policy announcement yesterday, which met expectations in terms of the central bank underscoring its newly codified lower-for-longer policy strategy, but also surprised with the dot plot marking up rate hikes in the future (which is not unreasonable as, once the pandemic panic passes there is likely to be a global boom given the level of stimulus). This gave the U.S. currency an underpinning.