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Daily FX Report

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EUR / USD

The Euro secured net gains into Friday’s New York open despite the negative developments surrounding a potential EU trade deal with the UK. There were also further concerns over the Euro-zone outlook as coronavirus cases continued to increase and restrictions were tightened. In particular, there was unease over the German outlook following tough warnings from Chancellor Merkel and Euro support gradually eroded later in the session as recovery fears increased.

US retail sales increased 1.9% for September compared with consensus forecasts of 0.7% and with a 5.4% annual increase. Underlying sales increased 1.5% on the month compared with expectations of a 0.5% increase and the control group recorded a 1.4% gain on the month.

Industrial production declined 0.6% for September after a revised 0.4% gain the previous month and substantially below market expectations of a 0.5% monthly increase. Manufacturing production also recorded a net decline on the month which created some uncertainty, although manufacturing surveys had suggested stronger conditions. The University of Michigan consumer confidence index strengthened slightly to 81.2 from 80.4 with a dip in current conditions offset by a gain in expectations.

The Euro was unable to break above 1.1750 and drifted lower into the European close amid underlying concerns over the Euro-zone outlook. According to CFTC data, there was only a small decline in long Euro positions in the latest week, maintaining the threat of a position squeeze. ECB President Lagarde stated that new coronavirus restrictions will heighted economic activity with markets expecting further stimulus measures. The Euro traded just above 1.1700 in early Europe on Monday.

JPY

Bank of Japan member Wakatabe commented that the bank does not target the exchange rate, but that they were following FX very closely. There was little immediate market impact with the dollar held in very tight ranges below 105.50 against the Japanese currency.

There were no decisive developments surrounding a US fiscal stimulus during the weekend. President Trump stated that he wanted a larger than expected fiscal stimulus while House Speaker Pelosi stated that Tuesday was the deadline for reaching agreement for reaching a deal.

China’s GDP data recorded a 4.9% increase in the year to the third quarter from 3.2% previously, but below consensus forecasts of 5.5%. Industrial production increased 6.9% over the year from 5.6% previously and above expectations of 5.8% with the retail sales data also above expectations at 3.3%. The data overall increased confidence in the Chinese growth outlook and helped underpin risk appetite, although the dollar continued to trade just below the 105.50 level.

GBP

Ahead of Friday’s New York open Prime Minister Johnson declared that the EU was not prepared to grant a Canada-style free-trade agreement and talks were effectively over. In this context, he stated that the UK needed to prepare for an Australia-style free-trade arrangement and no formal trade deal unless the EU made a fundamental change of approach. Sterling declined sharply on the news, but it regained some ground as Johnson did not close the door on further talks. The EU stated that it would come to London this week to continue talks with EU Commission President von der Leyen stating that they were still working for a deal. Markets assumed that this was a negotiating tactic, especially given economic pressures to secure a deal, but uncertainty remained extremely high.

Sterling dipped to lows near 1.2860 against the dollar before edging back above 1.2900. Late in Europe, the UK stated that the EU team should not come to London, but EU Chief Negotiator Barnier and Frost will talk on Monday. The Euro consolidated around 0.9070 after failing to hold above 0.9100.

Moody’s downgraded the UK credit rating to Aa3 from Aa2 due to a weaker growth outlook, an erosion of fiscal strength and weaker UK institutions. Sterling held steady on Monday as firmer global equities underpinned support and there were some reports that the Internal Market Bill could be withdrawn, although uncertainty over Brexit developments remained extremely high with a downbeat economic assessment from Bank of England Governor Bailey. Sterling traded above 1.2900 against the dollar.

CHF

The Swiss franc edged lower on Friday with a limited correction from the solid advance seen during the week. The Euro regained 1.0700 to trade around 1.0730 while the dollar settled around 0.9150, although franc moved were limited.

There was speculation that Switzerland would be named by the US as a currency manipulator which could curb National Bank intervention to weaken the Swiss currency and the franc also gained support from reservations over coronavirus developments. The franc was little changed on Monday with the dollar fractionally above 0.9150.

Contents

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