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By XE Market Analysis August 19, 2020 4:00 am
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    XE Market Analysis: Europe - Aug 19, 2020

    The pound has printed a fresh trend high against the dollar, at 1.3268, which is the loftiest level since December. The catalyst was much warmer than anticipated UK July inflation data, with headline CPI rising to a rate of 1.0% y/y from 0.6% y/y and with core CPI spike to a rate of 1.8% y/y from 1.5% y/y. The respective median forecasts had been for 0.6% and 1.3%, so a clear case of being wrong-footed. Elsewhere in the currency world, the dollar has largely managed to find a toehold after printing fresh trend lows against many currencies yesterday. The USD index (DXY) has been consolidating recent losses above Tuesday's 17-month low at 92.16, with EUR-USD concurrently holding off yesterday's 27-month peak at 1.1967. The yen has been underperforming amid a backdrop of rallying stock markets, as per the currency's usual correlation with risk appetite in global markets. The S&P 500 completed a 55% rally since its March lows to peg a record peak yesterday, which is being described as the fastest bear market recovery on record, fuelled by massive monetary and fiscal stimulus both domestically and internationally, and with the impact of the coronavirus in terms of severe/critical cases and mortalities having proved to be no where near as severe as feared back in March. The tech-laden Nasdaq pegged its 18th record closing high since early June. In Asia today, the MSCI Asia-Pacific index rallied to a seven-month high, despite declines in Chinese and Hong Kong indices. News that House Speaker Pelosi said that they (the Democrats) are willing to trim their proposals has been taken as a positive by markets, as it increases the odds that the Republicans and Democrats will break their stalemate and reach a deal on the next pandemic fiscal rescue package. July data showing an acceleration in homebuilding in the U.S. to the most in almost four years has also been a tonic for markets, while coronavirus infections are now dropping sharply in the recently afflicted sun states, such as Arizona, Texas and Florida, indicating the downward phase of a classic Gompertz curve progression of respiratory illness as community immunity builds up. USD-JPY rebounded from a three-week low at 105.11 to levels near 105.60. Most yen crosses also lifted.

    [EUR, USD]
    EUR-USD has been holding off yesterday's 27-month peak at 1.1967, which is fitting the broader pattern of the dollar settling above its recent lows. The USD index (DXY) has been consolidating recent losses above Tuesday's 17-month low at 92.16. The softer dollar hypothesis, which has been dominant in markets for several months, is currently being challenged. Most incoming U.S. data are showing a strong rebound, while the S&P 500 and Nasdaq equity indices have scaled to record highs. News that House Speaker Pelosi said that they (the Democrats) are willing to trim their proposals has been taken as a positive by markets, as it increases the odds that the Republicans and Democrats will break their stalemate and reach a deal on the next pandemic fiscal rescue package. July data showed an acceleration in homebuilding in the U.S. to the most in almost four years. Coronavirus infections are now dropping sharply in the recently afflicted sun states, such as Arizona, Texas and Florida, indicating the downward phase of a classic Gompertz curve progression of respiratory illness as community immunity builds up. In focus is today'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. Any confirmation of this would be bolster the softer dollar hypothesis, and likely push EUR-USD above 1.2000, while any lack of reference to this issue would have an inverse effect. The advent of the 750 bln euro recovery fund, which has reduced perceived EU break-up risks, and the fact that Europe has come through the pandemic ahead of the U.S. (having been impacted earlier), have been underpinning factors of EUR-USD, too.

    [USD, JPY]
    The yen has traded softer today amid a backdrop of rallying stock markets, as per the currency's usual correlation with risk appetite in global markets. The S&P 500 completed a 55% rally since its March lows to peg a record peak yesterday, which is being described as the fastest bear market recovery on record, fuelled by massive monetary and fiscal stimulus both domestically and internationally, and with the impact of the coronavirus in terms of severe/critical cases and mortalities having proved to be no where near as severe as feared back in March. The tech-laden Nasdaq pegged its 18th record closing high since early June. In Asia today, the MSCI Asia-Pacific index rallied to a seven-month high, despite declines in Chinese and Hong Kong indices. News that House Speaker Pelosi said that they (the Democrats) are willing to trim their proposals has been taken as a positive by markets, as it increases the odds that the Republicans and Democrats will break their stalemate and reach a deal on the next pandemic fiscal rescue package. July data showing an acceleration in homebuilding in the U.S. to the most in almost four years has also been a tonic for markets, while coronavirus infections are now dropping sharply in the recently afflicted sun states, such as Arizona, Texas and Florida, indicating the downward phase of a classic Gompertz curve progression of respiratory illness as community immunity builds up. USD-JPY rebounded from a three-week low at 105.11 to levels near 105.60. Most yen crosses also lifted. EUR-JPY retraced most of the losses seen yesterday in making a peak at 126.07, as did AUD-JPY in printing an intraday high at 76.56. 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]
    The pound has printed a fresh trend high against the dollar, at 1.3268, which is the loftiest level since December. The catalyst was much warmer than anticipated UK July inflation data, with headline CPI rising to a rate of 1.0% y/y from 0.6% y/y and with core CPI spike to a rate of 1.8% y/y from 1.5% y/y. The respective median forecasts had been for 0.6% and 1.3%, so a clear case of being wrong-footed. Rising prices were broad based, with clothing, household goods and gasoline prices driving the spike in headline data. CPI remains well below target, but the perkiness in the data should strengthen the BoE's wait-and-see stance and keep the possibility of negative interest rates, something that the central bank has been considering, although seems loathe to do, off the the table. Focus remains on trade talks between the EU and UK, which have continued over the summer season. The UK prime minister's spokesman said yesterday that Downing Street still believes a deal is possible as soon as next month, which is exactly what the UK's chief trade negotiator Frost said last Friday. We take a circumspect view of the pound's upside ongoing potential. A well connected UK journalist for The Sun tabloid reported this week of "growing whispers" that the EU's demands for the so-called "level-playing-field rules" (which will keep the UK bound to EU rules in return for a generous trade deal) could be too much to overcome. The matter is likely to go down to the wire, being October's EU leaders' summit. Given the risks of a no deal, or only a narrow deal, we expect the pound's upside to be limited from here, at least in trade-weighted terms. We also anticipate the UK's economic recovery from full lockdown to plateau in the weeks and months ahead. There are a number of localized lockdowns across the UK and new travel restrictions with foreign countries, while the government's furlough scheme will end in late October, which is likely to cause a sizeable upward jolt to the unemployment rate, with the aviation, retail and hospitality sectors to be hard hit.

    [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 remained heavy, testing yesterday's seven-month low at 1.3149. This is now the fifth consecutive week where the pair has descended below its prior week low. The broad softening in the U.S. dollar and ongoing perkiness in oil prices have been driving the down trend. Front-month WTI crude prices this week posted a two-week high at $42.99, which is less than 60 cent from the near-six-month peak seen in early August. The OPEC+ group affirmed that there was near full compliance on crude supply quotas among members. 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, while the U.S. currency waned as a safe haven unit before negative real U.S. yields (on the view that the Fed may become strategically more tolerant of inflation risk) subsequently become a dominant factor in driving the greenback's downtrend. 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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