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By XE Market Analysis August 3, 2020 4:32 am
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    XE Market Analysis: Europe - Aug 03, 2020

    The dollar has lifted, with the narrow trade-weighted USD index posting its best level since last Thursday, at 93.70, extending a rebound from the 25-month low that was seen on Friday at 92.55. EUR-USD concurrently ebbed to a below Friday's low on route to a low at 1.1741, extending the correction from Friday's 26-month peak at 1.1910. Cable similarly put in some distance from Friday's 1.3171 trend peak in pulling back to a low at 1.3057. USD-JPY printed a 10-day peak at 106.43, which is over 2 big figures up on Friday's five-month low at 104.18. AUD-USD descended to 0.7118, which is the pair's lowest level since last Tuesday and extends a correction from the 17-month peak that was seen on Friday at 0.7229. USD-CAD has traded firmer, though has remained within its Friday range, posting an intraday high at 1.3429. Oil prices are trading relatively steadily, above Friday's correction lows. Gold prices hit a fresh nominal record peak soon after the open in Asia-Pacific markets today, at $1,994.20, before capping out and settling to near net unchanged levels under $1,980.00. Stock markets in Asia have been mixed, while S&P 500 futures decline moderately. Japan's Nikkeo 225 outperformed, closing with a 2.2% gain, buoyed by the bounce in USD-JPY, while the MSCI Asia-Pacific index (ex Japan) ebbed by 0.5%. In news, the U.S. Congress is struggling to finalize a new fiscal relief package, despite pandemic-era unemployment benefits having expired on Friday. The impact of lockdown measures in response to the coronavirus remains a concern, too, although the media and many governments continue studiously overlooking the evidence of herd immunity developing in places where it has run its course (and not to mention that the SARS Cov-2 coronavirus, while highly contagious and bad news for the vulnerable, is not anywhere near a virulent for the broader population as feared back in March).

    [EUR, USD]
    EUR-USD ebbed below Friday's low on route to a low at 1.1741, extending the correction from Friday's 26-month peak at 1.1910. The dollar has once again been driving the pair, with the U.S. currency staging a rebound following a period of pronounced underperformance. The dollar's gains today come despite the U.S. Congress struggles to finalize a new fiscal relief package, even with pandemic-era unemployment benefits having expired on Friday. More than 30 million U.S. citizens will see there income drop by 50%-75% after today's expiry in the crisis unemployment benefits. Following the historic 32.9% y/y contraction in Q2 GDP, and with many states exercising lockdown measures, the pressure is on. The impact of lockdown measures in response to the coronavirus remains a concern, too, although the media and many governments continue studiously overlooking the evidence of herd immunity developing in places where it has run its course, such as most of Europe (and not to mention that the SARS Cov-2 coronavirus, while highly contagious and bad news for the vulnerable, is not anywhere near a virulent for the broader population as feared back in March). In Europe, localized bumps in new cases and led to some new travel restrictions, though the reopening process remains largely intact. EUR-USD, while in correction mode at present, still looks to be amid an overall up trend.

    [USD, JPY]
    USD-JPY printed a 10-day peak at 106.43, which is over 2 big figures up on Friday's five-month low at 104.18. Japan's Nikkeo 225 outperformed in Asia today, closing with a 2.2% gain, buoyed by the bounce in USD-JPY, while the MSCI Asia-Pacific index (ex Japan) ebbed by 0.5%. The Japanese currency is likely to remain apt to directional change on the back of shifting risk premia in global markets. While the BoJ remains committed to uber stimulus, the central bank is no longer unique in this regard (a reflection of this was the 2-year UK yield recently dipping below Japan's 2-year yield for the first time ever), and so has been having little weakening impact on the Japanese currency relative to peers. 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 built up a reputation as a reliable haven currency.

    [GBP, USD]
    Cable has put in some distance from Friday's 1.3171 trend peak in pulling back to a low at 1.3057. A rebound in the U.S. currency has been at play. The UK currency outperformed last week, though still registers as the weakest of the main currencies on the year-to-date, and by some distance in trade-weighted terms, while recent dollar underperformance has been somewhat flattering the pound. Nevertheless, there are some convincing bullish arguments in market narratives. One is the pick-up in the pace of economic recovery in the UK, as evidenced by the much stronger than forecast preliminary July PMI data and improvement in the CBI's July distributive sales report, which flagged a near full recovery in the retail sector, with sales in upcoming months seen at near seasonal norms. There has also been signs that have led markets to factor improved odds for a EU-UK trade deal, with a number of sourced press reports suggesting that discussions are going better than the official line suggests. There is now summer a hiatus in negotiations, which will resume on the week of August 17th. We see scope for Cable returning to levels around the 1.3500 mark.

    [USD, CHF]
    The Swiss franc has steadied at firmer levels after dropping quite sharply against the euro last Monday, which reflected broad outperformance of the common currency and, possibly, the added influence of the SNB's intervening hand. Weekly sight deposit figures out of Switzerland have been suggesting that the central bank has been continuing to sell francs regularly, as it has been since the consequences of the pandemic took a grip on markets, which had the impact of increasing demand for the Swiss currency. A rise in sight deposits (money held by commercial banks) can suggest francs turning up after being sold by the central bank. EUR-CHF made a rare appearance on the 'biggest daily mover' list out of the main dollar pairings and associated cross rates for a spell last week, showing a 1% gain on one day. A two-month high was pegged at 1.0841 before the cross took a rotation lower. The seven-month peak, seen in early June, is at 1.0921. The advent of the EU's recovery fund, seen as a milestone by many analysts (a new liquid AAA fund that also reduces Eurozone breakup risks) has by many accounts caused a re-weighting of the common currency in portfolios.

    [USD, CAD]
    USD-CAD has traded firmer, though has remained within its Friday range, posting an intraday high at 1.3429. Oil prices are trading relatively steadily, above Friday's correction lows. Front-month WTI crude futures hit a three-week low last Thursday at $38.72, and while since recouping to levels near $40.0, remain down by over 4% from week-ago levels. The Canadian dollar will likely remain hostage to fluctuations to the U.S. dollar and oil prices. Downside risks for the Canadian dollar include the OPEC+ group's course to easing output quotas, which could weigh on oil prices, alongside the coronavirus pandemic and geopolitical tensions, should they derail the recovery in global asset markets.

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