COVID-19 drives the markets again (Daily analysis 18.11.2020)

With no new positive vaccine-related news, sentiment sours as COVID-19 fears take centre stage once again. FX markets mainly stabilize and volatility declines. The US dollar marginally weakens, predominantly against currencies considered as safe havens and the sterling.

The EUR/USD pair drifts higher within a familiar 1.16-1.20 range. The main currency pair appreciates for the fifth day in a row, but during this streak has so far failed to gain more than one percent and move above the 1.19 boundary. A breach above last week's high (1.1930) could trigger a more decisive move higher.

Save havens and bid

The USD/JPY pair failed to cling to its recent gains and stay above 105.50 mark. The pair depreciated and moved below 104.00. Risks are clearly tilted to the downside as safe havens lure investors when risk aversion takes over and fails to decline when equities rally. For example, Nikkei225 set new record highs this week, and the Japanese yen remained bid.

Recently, the epidemic situation in Japan has become more worrying as well. Tokyo reported almost five hundred new cases yesterday. The same applies to the United States, where a positivity rate edges towards 10% despite the number of conducted tests has been doubled since two months ago. Consequently, authorities in more and more states are forced to introduce new measures to contain the spread of the virus. COVID-19 headlines will continue to drive the market sentiment.

Commodity and EM become fragile

In such an environment commodity currencies may underperform, especially given their latest rally. The Russian ruble and the Norwegian krone became vulnerable as the OPEC+ Joint Ministerial Monitoring Committee failed to issue a recommendation to postpone the easing of output curbs which keeps markets guessing ahead of the official OPEC+ meeting, which takes place at the end of November. Rising uncertainty about OPEC+ plans, increasing inventories and lacklustre demand for fuels given worsening of the pandemic globally point to erasing some of crude oil benchmarks' recent gains.

Noteworthy, the pound sterling defies its risk profile, and the GBP/USD pair soars towards 1.33 level as sources told Bloomberg that a breakthrough may arrive as soon as Monday. The sterling's appreciation is to be expected, yet a road to a deal may still be bumpy.

Conotoxia research team