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By XE Market Analysis August 6, 2020 4:40 am
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    XE Market Analysis: Europe - Aug 06, 2020

    The USD index edged out a fresh 27-month low at 96.53, continuing what is a fourth consecutive week of decline and a fourth straight month of decline, dropping by just over 10% from the early March peak. The loss of confidence in the U.S. currency has partly been reflected in the ongoing rally in gold, which has remained buoyant after posting a fresh record nominal high at $2,057.50 yesterday. A deal on the U.S. fiscal package remains elusive, though President Trump's threat to take executive action to cut payroll taxes managed to keep investor spirits up, along with the above-forecast services ISM out of the U.S., and more positive news from the candidate vaccine front for the SARS Cov-2 coronavirus. The good vibe across equity markets flagged somewhat as the Asia session wore on, however. The MSCI Asia-Pacific equity index printed a six-and-a-half-month-high during early trading before turning lower to near net unchanged levels. S&P 500 futures, while off highs, still showed moderate gains. AUD-USD saw a downward flurry after the Australian government lifted its unemployment forecast while forecasting growth would be trimmed by 2.5 percentage points as a consequence of its own lockdown measures (having choosen the sledge hammer approach, similar to many other nations, despite the standout success of the much less costly Swedish approach, which has refrained from lockdown and masks and has performed near the same as most other European countries during the pandemic, with its ICU and mortality numbers having now dropped to near nothing). AUD-USD dipped to a 0.7184 low, which is nearly 60 pips below yesterday's peak. Elsewhere, EUR-USD edged out a new 27-month high at 1.1917, and Cable a five-month peak at 1.3182. USD-JPY idled in the mid 105.00s, above yesterday's six-day low at 105.32. USD-CAD settled above the six-month low seen yesterday at 1.3231. Front-month WTI crude futures settled in the lower $42.0s, below Wednesday's five-month peak at $43.52.

    [EUR, USD]
    EUR-USD edged out a new 27-month high at 1.1917, reflective once again of a broad ebb in the dollar. The USD index concurrently edged out a fresh 27-month low at 96.53, continuing what is a fourth consecutive week of decline and a fourth straight month of decline, dropping by just over 10% from the early March peak. The loss of confidence in the U.S. currency has partly been reflected in the ongoing rally in gold, which has remained buoyant after posting a fresh record nominal high at $2,057.50 yesterday. A deal on the U.S. fiscal package remains elusive, though President Trump's threat to take executive action to cut payroll taxes managed to keep investor spirits up, along with the above-forecast services ISM out of the U.S., and more positive news from the candidate vaccine front for the SARS Cov-2 coronavirus. Markets are sensitive to what the size and scope of the new fiscal plan will be, with high frequency data is painting a picture of flagging growth momentum in the U.S. economy. While markets have lost confidence in the dollar as a safe haven, recent gains in the euro demonstrates a new-found confidence in the common currency. The agreement on the EU's 750 bln 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. In Europe, localized bumps in new coronavirus cases (which many media outlets like to describe as "surges") have led to some new travel and other lockdown restrictions, though the reopening process remains largely intact. New cases in some of the recently afflicted states in the U.S., including Texas and Florida, have started to drop quite sharply. We remain EUR-USD bullish, anticipating a visit to the 1.2000 level. Dollar bears should take note that President Trump reported said there is a "big number" coming with Friday's jobs report.

    [USD, JPY]
    USD-JPY idled in the mid 105.00s, above yesterday's six-day low at 105.32. 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 posted a new five-month peak at 1.3182, this time floated not just by dollar weakness but also by a good measure of sterling outperformance on the back of the BoE's policy statement, which has driven EUR-GBP nearly 0.5% low to a two-day low at 0.9000. The pound has also gained about 0.5% versus the Australian dollar, and is up on the yen and other currencies, too. The gains were sparked by the BoE, which left monetary policy settings unchanged today while giving a cautiously optimistic take on the outlook, stating that the lockdown-induced downturn is less severe than initially foreseen. While the statement highlighted the likely sharp decline in Q2 activity levels, with GDP seen down around -20% y/y, it also noted the rebound in more timely higher-frequency indicators and a pick-up in housing market activity, and said that it expects a rebound, albeit gradual, in business investment. The BoE still cautioned that the unemployment rate is projected "to rise materially, to around 7.5% by the end of the year." The central bank stated that it remains committed not to tighten policy "until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably". The warily more upbeat BoE comes the forex markets factoring better odds for a EU-UK trade deal, with a number of recent sourced UK 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. The final round of discussions is set for the week commencing October 2nd. Market narratives have also been noting a pick-up in the pace of economic recovery in the UK, as confirmed by July PMI data, though the new lockdown in the economically-important Manchester area, and the continued media-driven "feardemic," is to an extent clouding the outlook at a time when government pandemic business support measures have started to unwind (compensation for furloughed workers was reduced this week).

    [USD, CHF]
    The Swiss franc has steadied below lows after showing 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 settled above the six-month low seen yesterday at 1.3231. This price action has been concomitant with front-month WTI crude futures settled in the lower $42.0s, below Wednesday's five-month peak at $43.52. 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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