XE Market Analysis: Europe - Oct 02, 2020

The yen has rallied versus other currencies amid a pronounced risk-off positioning theme in global markets on news that President Trump, along with the First Lady and White House public relations counsellor, have tested positive for Covid. S&P 500 E-minis are 1.4%, and Asian stock markets and European equity index futures have also taken a hit. USD-JPY dove by over 0.5% in pegging a low at 104.94. EUR-JPY fell to a four-day low and the high beta AUD-JPY cross plummeted by over 1% to two-day lows under 75.00. Trump's health is an added item on a growing worry list. With Trump is now self-isolating, and at the least his pre-election campaigning will be greatly curtailed. CDC data showis a 94.6% survival rate for people over 70, though presumably this is better for people in their early-to-mid 70s, like Trump, as the data will be skewed by people over 80, who are at greater risk. Among other currencies, EUR-USD dipped to a two-day low at 1.1694 before rebounding quite sharply to a 1.1738 peak. Cable saw a similar price action, bouncing out of a low at 1.2838. AUD-USD posted a two-day low at 0.7132. USD-CAD lifted back above 1.3300 and matched yesterday's peat at 1.3329. In Japan, August unemployment came in at 3.0%, matching expectations and having no impact. Chinese and South Korean markets remained closed. Ahead, the flash September estimate of Eurozone CPI is up, where we expect a -0.4% y/y outcome after -0.2% y/y in the prior month. In the U.S., the September payrolls report is up. We expect it to show a continued rebound as workers returned to work, but there will still be a net drop in employment for 2020 overall. Political negotiations on a new fiscal relief package in the U.S. remain ongoing. The mood music has improved somewhat, with some Republicans eager to strike a deal with the Democrats before the November-3 elections. The Covid situation in Europe remains a concern, with the new case rate high and new restrictions in one form or another being introduced seemingly daily in many countries.

[EUR, USD]
EUR-USD dipped to a two-day low at 1.1694 before rebounding quite sharply to a 1.1738 peak. EUR-JPY, meanwhile, dropped quite sharply as the yen proved to be a more favoured safe haven than the dollar following news of President Trump testing positive for Covid. The flash September estimate of Eurozone CPI is up today, where we expect a -0.4% y/y outcome after -0.2% y/y in the prior month. The data should maintain the recently more aggressively dovish stance at the ECB, which looks on track to make a similar regime change as the Fed with symmetrical inflation targeting being considered. In the U.S., the September payrolls report is up today. We expect it to show a continued rebound as workers returned to work, but there will still be a net drop in employment for 2020 overall. Political negotiations on a new fiscal relief package in the U.S. remain ongoing. The mood music has improved somewhat, with some Republicans eager to strike a deal with the Democrats before the November-3 elections. The Covid situation in Europe remains a concern, with the new case rate high and new restrictions in one form or another being introduced seemingly daily in many countries. Overall, a convoluted picture behind EUR-USD, but retain a bearish view.

[USD, JPY]
The yen has rallied versus other currencies amid a pronounced risk-off positioning theme in global markets on news that President Trump, along with the First Lady and White House public relations counsellor, have tested positive for Covid. S&P 500 E-minis are 1.4%, and Asian stock markets and European equity index futures have also taken a hit. USD-JPY dove by over 0.5% in pegging a low at 104.94. EUR-JPY fell to a four-day low and the high beta AUD-JPY cross plummeted by over 1% to two-day lows under 75.00. Trump's health is an added item on a growing worry list. With Trump is now self-isolating, and at the least his pre-election campaigning will be greatly curtailed. CDC data showis a 94.6% survival rate for people over 70, though presumably this is better for people in their early-to-mid 70s, like Trump, as the data will be skewed by people over 80, who are at greater risk. In Japan, August unemployment came in at 3.0%, matching expectations and having no impact on markets with the gaze of participants focused on Trump's health and what implications it may have on the upcoming election, along with the ongoing political negotiations on a new fiscal relief package in the U.S. (some Republicans are eager to strike a deal with the Democrats before the November-3 elections), and the worsening Covid situation in Europe, which is causing more restrictions. Also in the U.S., the September payrolls report is up today. 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 traded mixed over the last week, gaining on the dollar and yen, while showing little net change against the euro and declines against the Australian dollar. Yesterday the currency saw high volatility on confusing Brexit headlines. In the mix was the European Commission president von de Leyen announcing yesterday that the EU has taken the first step in a legal infringement procedure against the UK in relation to the UK government's controversial Internal Market Bill. This is a sideshow, as talks on the future relationship have continued. We expect that the two sides will come to a deal. The incentives for a deal far outgun the political and economic risks in a no deal scenario, especially on the UK's side of the Channel. Like all things Brexit, the issue will likely go down to the wire, which is effectively the upcoming EU summit on October 15th-16th, rather than the UK's actual year-end exit from the common market. We also take note that the UK government last month said that it will not finalise the details of its post-Brexit state aid regime until next year, which at the time elicited an angry response from Brussels. As things stand, it's hard to see that the EU and UK will be able to come up with anything other than a relatively narrow trade deal. Trade negotiations between the two will remain an evolving process long after the UK leaves the single market. Come January 1, the UK's terms of trade position looks set to be jolted lower, when significant parts of the economy's trade will shift to WTO terms. We take a bearish medium- to longer-term view of sterling.

[USD, CHF]
EUR-CHF has ebbed back under 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, 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 still remains below the seven-month peak that was seen in early June at 1.0921.

[USD, CAD]
USD-CAD dipped back under 1.3000 after earlier matching yesterday's peat at 1.3329. The pair is likely to remain bias to the upside, assuming the risk appetite remains weak, given Trump's Covid condition and rising Covid cases in Canada and Europe, which is leading to economically disruptive counter measures in the form of restrictions (on social gathering, travel etc) and localized lockdowns.