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By XE Market Analysis August 14, 2020 3:53 am
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    XE Market Analysis: Europe - Aug 14, 2020

    The main currencies have settled in narrow ranges, with the dollar consolidating above yesterday's lows after a two-day decline. The USD index (DXY) has steadied in the lower 93.0s, above yesterday's one-week low at 92.93. EUR-USD has concurrently reached a stasis in the lower 1.1800s, below Thursday's one-week peak at 1.1865. The pair has been in a strong uptrend since early May, producing last week's 27-month high at 1.1917, though upside momentum has flagged over the last two weeks. The advent of the 750 bln euro recovery fund and the fact that Europe has come through the pandemic ahead of the U.S. has been underpinning EUR-USD, along with the perception that the Fed is strategically being less attentive to inflation risks, which pushed real Treasury yields deep into negative territory. This dynamic looks to be shifting in certain aspects, which may curtail EUR-USD's uptrend. New coronavirus cases are dropping in sun states as community immunity builds up, having already done so in other parts of the U.S., while high frequency data and the July employment report are evidencing rebounding economic activity. Elsewhere today, USD-JPY has been plying a narrow range below yesterday's three-week high at 107.06. Cable has settled near 1.3050, holding well within the broadly sideways range that's been seen over the last week. Ditto for AUD-USD, which has been making time near the 0.7150 mark. USD-CAD has settled in the lower 1.3200s, above the eight-month low of yesterday, at 1.3190.

    [EUR, USD]
    EUR-USD has reached a directional stasis in the lower 1.1800s, below Thursday's one-week peak at 1.1865. The pair has been in a strong uptrend since early May, producing last week's 27-month high at 1.1917, though upside momentum has flagged over the last two weeks. The advent of the 750 bln euro recovery fund and the fact that Europe has come through the pandemic ahead of the U.S. has been underpinning EUR-USD, along with the perception that the Fed is strategically being less attentive to inflation risks, which pushed real Treasury yields deep into negative territory. This dynamic looks to be shifting in certain aspects, which may curtail EUR-USD's uptrend. New coronavirus cases are dropping in sun states as community immunity builds up, having already done so in other parts of the U.S., while high frequency data and the July employment report are evidencing rebounding economic activity. One concern, and risk for the dollar, remains the political stalemate over the pandemic recovery funding. Washington's tensions with Beijing are a further concern, although this evidently hasn't been much of a concern for Wall Street (with the S&P 500 within a whisker of record highs). The two sides are meeting this weekend to review progress on the Phase 1 trade deal. China has been lagging behind in its purchases of U.S. farm and energy goods, so the meeting is a potential flashpoint.

    [USD, JPY]
    USD-JPY has been plying a narrow range below yesterday's three-week high at 107.06. 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, 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 settled near 1.3050, holding well within the broadly sideways range that's been seen over the last week. EUR-GBP has also remained steady, consolidating a near 1% gain that was seen earlier in the week. This week's release of Q2 GDP data showed the UK endured a deeper growth contraction that all of its European peers over the first two quarters of the year, which gave EUR-GBP buoyancy. As for the pound and euro's recent outperformance versus many other currencies, some market narratives have been highlighting that Europe is ahead of the pack in terms of the coronavirus cycle. The all-cause mortality rate remains below the long term average in Europe, having dropped back from the sharp spike in March-April, and clusters of new infection cases have over the last couple of months not come with a corresponding rise in actual public health events (clinical cases, hospitalizations, mortalities), which is very similar pattern seen during the latter stages of the swine flu epidemic of 2009 before the virus burnt out. We take a circumspect view of the outlook for the pound over the coming months, anticipating a plateauing in economic rebound momentum in the UK. Manchester, Preston, Bradford and Aberdeen are back in lockdown amid a persisting 'feardemic', and there are a number of new travel restrictions with other countries. The furlough scheme will end in late October, which is likely to trigger a wave of job losses, particularly in the airline, retail and hospitality sectors. The Brexit endgame also remains unresolved, and is likely to remain an uncertainty into October.

    [USD, CHF]
    EUR-CHF has been holding around 1.0750-1.8000 for about a month now. The influence of the SNB's intervening hand seems to have been helping keep the cross buoyant, especially with upside momentum in EUR-USD flagging. Weekly sight deposit figures out of Switzerland have been suggesting that the central bank has been continuing to sell francs, 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 clocked a seven-month peak early June at 1.0921 before settling lower. 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 eked out a new six-month low at 1.3219. A weakening U.S. dollar, coupled with perky oil prices have been weighing on the pair, which we anticipate will retain a down-trending bias. Front-month WTI crude futures have carved out a fresh one-week high at $42.85. Bigger picture, USD-CAD pair has been trending lower, albeit with waning momentum, since mid March, after there had been a burst of demand of U.S. dollars when pandemic panic gripped the world. 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 unit, 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 will 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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