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By XE Market Analysis August 18, 2020 3:58 am
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    XE Market Analysis: Europe - Aug 18, 2020

    The dollar continued to soften, which pushed the USD index (DXY) to a low at 92.53, which is 1 pip shy of the 27-month low that was seen on August 6th. EUR-USD correspondingly rose to a 12-day peak at 1.1904, which is 13 pips shy of the pair's 27-month peak. Cable rallied by 0.5% in making a 12-day high at 1.3168, while EUR-GBP reversed most of the gains it saw yesterday in making a 0.9035 low. AUD-USD pegged an 11-day high at 0.7234, and USD-CAD descended to a seven-month low at 1.3169. Aside from the generally softer U.S. dollar, the Canadian currency has been buoyed by continued perkiness in oil prices. Yesterday the OPEC+ group said there was near full compliance on supply quotas amount members, lifting front-month WTI crude futures to a $42.83 peak, which is 70 cents shy of the five-month peak that was clocked in early August. In the mix has been a measure of yen outperformance, with USD-JPY ebbing to a 12-day low at 105.46 while EUR-JPY and AUD-JPY drifted into respective six- and four-day low terrain. In stock markets, a tech-led rally drove the Nasdaq to a record closing high on Monday, while the S&P 500 neared its record peak. The MSCI Asia-Pacific index has today rallied to near to its pre-pandemic January high, though U.S. index futures and European stocks have come under pressure. The White House announced yesterday further restrictions on China's Huawei, which are aimed at limiting the company's access to commercially available chips and which has the potential to disrupt global supply chains. President Trump, meanwhile, stated that China is meeting its obligations under the Phase 1 trade deal, although a review of the deal has been delayed. Beijing announced that it will be making an anti-dumping inquiry on Australian wine imports. In focus is tomorrow's publication of the minutes from the recent FOMC meeting, which comes amid market speculation that the Fed may adopt an average inflation target, specifically with the aim of pushing inflation above the 2% target. This has been a dollar negative, as it has driven real Treasury yields deep in to negative terrain.

    [EUR, USD]
    EUR-USD rose to a 12-day peak at 1.1904, which is 13 pips shy of the pair's 27-month peak. The gains reflect broader declines in the dollar, while EUR-JPY and EUR-GBP have declined. In focus tomorrow is the publication of the minutes from the recent FOMC meeting, which comes amid market speculation that the Fed may adopt an average inflation target, specifically with the aim of pushing inflation above the 2% target. This has been a dollar negative, as it has driven real Treasury yields deep in to negative terrain. Any confirmation of this would be bolster the softer dollar hypothesis that's been in play in markets for some time (negative Treasury yields, the more recent impact of the pandemic in the U.S. relative to Europe and other parts of the world, the political stalemate over the new pandemic relief package, risks presented by U.S.-China tensions, etc). The advent of the 750 bln euro recovery fund, which has reduced the perceived EU break-up risk, and the fact that Europe has come through the pandemic ahead of the U.S. has been an underpinning factor of EUR-USD. We advise trend following for now, anticipating levels above 1.2000. Dollar bears should, however, take note that incoming U.S. data have largely been showing continued economic recovery alongside an up-tick in inflation, while the coronavirus curves of ICU admissions and mortalities are now dropping sharply (although the "case-demic" and "fear-demic" can be expected to continue, and with a political edge into the November presidential election).

    [USD, JPY]
    The yen has been outperforming moderately today. USD-JPY ebbed to a 12-day low at 105.46, while EUR-JPY and AUD-JPY drifted into respective six- and four-day low terrain. In stock markets, while a tech-led rally drove the Nasdaq to a record closing high on Monday, U.S. index futures and European stocks have come under pressure. The White House announced yesterday further restrictions on China's Huawei, which are aimed at limiting the company's access to commercially available chips and which has the potential to disrupt global supply chains. President Trump, meanwhile, stated that China is meeting its obligations under the Phase 1 trade deal, although a review of the deal has been delayed. Beijing announced that it will be making an anti-dumping inquiry on Australian wine imports. In focus today is tomorrow's publication of the minutes from the recent FOMC meeting, which comes amid market speculation that the Fed may adopt an average inflation target, specifically with the aim of pushing inflation above the 2% target. This has been a dollar negative, as it has driven real Treasury yields deep in to negative terrain. The Japanese currency had been underperforming in recent weeks, with EUR-JPY, for instance, last week posting a 16-month high, and with AUD-JPY remaining buoyant since printing a 15-month peak last month. The yen 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 a reputation as a reliable haven currency. With global asset markets having been buoyant of late, the yen has been on a underperforming path versus most currencies.

    [GBP, USD]
    Cable rallied by 0.5% in making a 12-day high at 1.3168, while EUR-GBP reversed most of the gains it saw yesterday in making a 0.9035 low. Indications that the EU and UK will reach a trade deal remain good, though the breadth of any deal remains uncertain, and won't likely be clear until October's EU leaders' summit (despite UK's chief trade negotiator Frost saying last Friday that he thinks a deal is possible as soon as September). The UK government has this week implemented a further post-epidemic reopening, with bowling allies, casinos and the like reopening, but the economic recovery path is still likely to plateau in the weeks and months ahead, exacerbated by a number of localized lockdowns across the UK and new travel restrictions with foreign countries. The government's furlough scheme will end in late October, too, which is likely to trigger a wave of job losses, particularly in the aviation, retail and hospitality sectors. Overall, while we are not bearish, we also don't anticipate much upside potential for the pound in the period ahead.

    [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 has descended to a seven-month low at 1.3169. Aside from the generally softer U.S. dollar, the Canadian currency has been buoyed by continued perkiness in oil prices. Yesterday the OPEC+ group said there was near full compliance on supply quotas amount members, lifting front-month WTI crude futures to a $42.83 peak, which is 70 cents shy of the five-month peak that was clocked in early August. USD-CAD has been trending lower, albeit with waning momentum, since mid March. 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) 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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