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By XE Market Analysis August 12, 2020 4:49 am
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    XE Market Analysis: Europe - Aug 12, 2020

    The dollar is up for a fourth consecutive trading day, lifting narrow trade-weighted USD index to an eight-day high at 93.77. EUR-USD concurrently carved out a nine-day low at 1.1711, Cable a five-day low at 1.3017, and AUD-USD an eight-day nadir at 0.7110. The dynamic marks an extension in correction from the trend highs that all three pairings saw last week, before the U.S. jobs report. USD-JPY, meanwhile, has floated to a 19-day peak at 106.80, aided in part by a measure of yen underperformance. USD-CAD lifted to an intraday high at 1.3348, which is an 80 pip gain on the eight-day low seen on Tuesday. Front-month WTI futures have settled near $42.00, below the eight-day peak seen yesterday at $42.40. Gold prices extend the sharp correction from last week's record nominal highs, posting a three-week trough at $1,876.50, which marked over a 10% decline from record peak. The recovery in the dollar, and the sharp drop in gold prices, is something of a reality check on recent narratives that were questing the U.S. economy, the coronavirus and lockdowns, and the dollar's role as the world's reserve currency. Focus will remain on Washington, with the stalemate over the pandemic relief stimulus package persisting on Capitol Hill. It has now been four days that Republican and Democrat leaders haven't met. On the coronavirus front, the view that SARS Cov-2 is a major threat to human wellbeing still prevails, although the unfolding data is buoying an alternative view; that: 1, it's not so out of the ordinary, bringing a death rate to populations where it establishes itself of about 0.05% (5 in 10,000), with the average age of mortalities being over 80; 2, it burns itself out much quicker than the panic-stricken 'mainstream' view thinks, which is being reflected in unfolding classic Gompertz curves of respiratory illness (cases first growing exponentially, then flattening to linear growth, then turning and dropping to near nothing in terms of clinical cases and mortalities as herd immunity establishes), and seasonal distribution patterns.

    [EUR, USD]
    EUR-USD carved out a nine-day low at 1.1711, reflecting a continued phase of dollar gains. The narrow trade-weighted USD index is up for a fourth consecutive trading day, reaching today an eight-day high at 93.79. The recovery in the dollar, alongside the sharp drop in gold prices, is something of a reality check on recent narratives that were questing the U.S. economy, the coronavirus and lockdowns, and the dollar's role as the world's reserve currency. Focus will remain on Washington, with the stalemate over the pandemic relief stimulus package U.S.-China tensions also remain a concern. Trade talks between the two are scheduled for this weekend, which comes after the President Trump banned Tiktok and WebChat from operating in 45 days if they are not sold by Chinese parent companies, along with sanctioning 11 Chinese and Hong Kong officials. We are less bullish of EUR-USD than hitherto, when we were targetting 1.2000, partly on the evidence the U.S. July jobs report presented and partly as the coronavirus rate of new infections drop across the sun states, fitting the classic Gompertz curve of annual respiratory illnesses. While the 'feardemic' will no doubt persist, as it has across Europe, the reality is that the U.S. will see its overall Gompertz curve of the coronavirus flatten to near nothing, as it has done in Europe and places such as New York, where herd immunity has built up. The experience in Europe has been for localized bumps in new infections to show up, which has led to lockdown measures being re-imposed. These bumps, however, have not led to a corresponding rises in hospitalizations or mortalities.

    [USD, JPY]
    USD-JPY rose to a 19-day peak at 106.80, floated by dollar weakness with aid of a measure of yen underperformance. 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 ebbed to a five-day low at 1.3017, reflecting a firmer dollar environment. We have been talking down the pound, to a degree, having seen limited scope for the currency to sustain its recent patch of outperformance. The BoE last week delivered a warily-upbeat outlook, though with localized lockdowns and most media doing their utmost to maintain maximum fear of a second wave of coronavirus infections, we take a circumspect view of the outlook over the coming months, anticipating a plateauing in economic rebound momentum. Both Manchester and Aberdeen are back in lockdown. The city of Leicester, however, reopened last week after being locked down for most of the past month. Worth noting is the fact that there has been no follow-through in Leicester from a bump in higher in terms of new cases -- i.e. no event impact of corresponding higher hospital admittances and mortality. Brexit remains unresolved, although off the agenda for now during the summer break. Talks are scheduled to resume on the week of August 17th. The final round of discussions is set for the week commencing October 2nd. Recent sourced articles in the UK press have suggested that there is greater scope for a deal being struck than the official line has suggested, and there is certainly incentive on both sides for a deal to be made, though it would still remain to be seen how extensive a new trade deal would be. The UK calendar this week is features monthly labour data (Tuesday), preliminary Q2 GDP data along with June production and trade data (Wednesday).

    [USD, CHF]
    The Swiss franc has steadied below lows after showing a noticeable drop last Monday, as it did the Monday prior. The influence of the SNB's intervening hand seemed 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 lifted to an intraday high at 1.3361, which is an 80 pip gain on the eight-day low seen on Tuesday. Front-month WTI futures have settled near $42.00, below the eight-day peak seen yesterday at $42.40. Bigger picture, USD-CAD pair has been trending lower, albeit with waning momentum, since mid March, when there had been a burst of demand of U.S. dollars when pandemic panic gripped the world. The culmination of that trend is the six-month that was logged last Wednesday at 1.3231. The global economic recovery from lockdowns, which were at their zenith in April, has been instrumental in USD-CAD's downtrend, with the Canadian currency rising concomitantly with oil prices while the U.S. currency has waned as a safe haven currency, and with negative real U.S. yields (on the view that the Fed may become strategically more tolerant of inflation risk) also eroding the greenback's performance. The Canadian dollar should continue to remain sensitive to fluctuations in 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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