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By XE Market Analysis August 4, 2020 4:05 am
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    XE Market Analysis: Europe - Aug 04, 2020

    The dollar has been ebbing moderately lower into the London interbank open, though has largely remained above lows seen on Monday. The USD index (DXY) drifted to a 96.43 low after yesterday's rebound capped out at a six-day high at 93.99. This has come amid a risk-on backdrop, which has propelled the MSCI Asia-Pacific index to gains of over 1%, along with lifting U.S. and European equity index futures. Strong manufacturing data out of the U.S. and elsewhere yesterday, continued gains in tech stocks, and Germany's Ifo institute stating that there are signs of recovery in the auto manufacturing industry, have been bullish tonic for asset markets, offsetting the stalemate on Capitol Hill over the next pandemic fiscal support bill and anxieties about Hurricane Isaias. New Jersey governor has declared a state of emergency as the U.S. Atlantic coastal states brace for the storm. EUR-USD lifted moderately, posting an intraday high at 1.1778, extending the rebound from yesterday's eight-day low at 1.1696. Cable saw a similar price action, making a rebound peak at 1.3089 after setting a five-day low at 1.3004 yesterday. USD-JPY plied a narrow range just above the 106.00, holding well within Monday's range. AUD-USD lifted to an intraday high at 0.7146, which is 9 pips shy of yesterday's peak. The RBA left its cash rate unchanged following its August policy review today, and announced a resumption in bond buying from tomorrow "to ensure the yield on 3-year bonds remains consistent with the target" of around 25 bp. The RBA adopted yield curve control back in March. Regarding the outlook, the central bank highlighted a likely "uneven and bumpy" recovery in the state of Victoria, which has gone lockdown in response to a flare up in coronavirus cases. Elsewhere, USD-CAD ebbed to a five-day low at 1.3358. Front-month WTI crude prices remained buoyant after yesterday hitting a five-day high at $41.22. Gold prices settled about $10-$15 off of yesterday's nominal record high at $1,997.00.

    [EUR, USD]
    EUR-USD has lifted moderately, posting an intraday high at 1.1778, extending the rebound from yesterday's eight-day low at 1.1696. The pair has continued, for now, to be driven by broader shifts in the dollar. The USD index (DXY) today drifted to a 96.43 low after yesterday's rebound capped out at a six-day high at 93.99. This has come amid a risk-on backdrop. Strong manufacturing data out of the U.S. and elsewhere yesterday, continued gains in tech stocks, and Germany's Ifo institute stating that there are signs of recovery in the auto manufacturing industry, have been bullish tonic for asset markets, offsetting the stalemate on Capitol Hill over the next pandemic fiscal support bill and anxieties about Hurricane Isaias. New Jersey governor has declared a state of emergency as the U.S. Atlantic coastal states brace for the storm. The impact of lockdown measures in response to the coronavirus remains a concern, too (although the media and many governments continue studiously overlook the evidence of herd immunity developing in places where it has run its course, such as most of Europe, along with the fact that the SARS Cov-2 coronavirus, while highly contagious and of genuine concern to the vulnerable, is not anywhere near a virulent for the broader population as feared back in March). In Europe, localized bumps in new cases have led to some new travel and other lockdown restrictions, though the reopening process remains largely intact. While the epidemic in Europe has passed, the "feardemic" of a second wave remains in full force. EUR-USD looks to remain in an overall up trend.

    [USD, JPY]
    USD-JPY has been plying a narrow range just above the 106.00, holding well within Monday's range, while the yen has posted moderate losses against most of the other main currencies amid backdrop of rallying global stock markets. 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 made a rebound peak at 1.3089 after setting a five-day low at 1.3004 yesterday. The UK currency has been directionally more neutral against the euro and most other currencies. The pound 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 had been somewhat flattering the pound. Helping the pound last week were 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. Narratives last week had also been noting a pick-up in the pace of economic recovery in the UK, though final July manufacturing PMI was unexpectedly revised lower while localized lockdowns, including in the economically-important Manchester area, and the continued media-driven "feardemic," is clouding the outlook for the UK economy at a time when government pandemic business support measures have started to unwind (compensation for furloughed workers has been reduced). The BoE reviews policy this week (announcing on Thursday), where a no change is widely anticipated, alongside what will no doubt be a reassuringly strong commitment to maintain ultra-accommodative policy. The central bank will also release its quarterly policy review with revised growth and inflation forecasts.

    [USD, CHF]
    The Swiss franc again showed a noticeable drop on Monday, as it did the Monday prior. The influence of the SNB's intervening hand seems to have been at play. 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. Last Monday, EUR-CHF made a rare appearance on the 'biggest daily mover' list out of the main dollar pairings and associated cross rates, when is showed a 1% gain on one day. The crosses yesterday matched the two-month high that was first pegged last week at 1.0841. 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, and which will help the SNB combat what it sees as a chronically overvalued franc.

    [USD, CAD]
    USD-CAD has ebbed to a five-day low at 1.3358. The low has been concomitant with front-month WTI crude prices remaining buoyant after yesterday hitting a five-day high at $41.22. 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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