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By XE Market Analysis August 20, 2020 4:31 am
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    XE Market Analysis: Europe - Aug 20, 2020

    The dollar has retained demand in the wake of the FOMC minutes, the bottom line from which was that there is no immediate plan to take unconventional stimulus measures in monetary policy. The narrow trade-weighted USD index edged out a three-day peak at 93.09, extending the rebound that was sparked by the minutes and from the 27-month low that was pegged on Wednesday at 92.13. EUR-USD has remained heavy, coming within 1 pip of yesterday's post-minutes three-day low at 1.1830, while Cable printed a six-day low at 1.3068. USD-JPY whittled out a three-day peak at 106.21, despite posting only a 22-pip range. AUD-JPY, which is widely seen as a forex barometer of investor appetite in global asset markets, ebbed to an eight-day low at 75.99, while AUD-USD declined to a three-day low at 0.7161. News that Australian regulators are to reject acquisitions by a Chinese company maintained the deterioration in relations between some Western nations and China. USD-CAD remained firm, but just below yesterday's 1.3228 peak, which marked the culmination of a rebound from a seven-month low at 1.3234. Elsewhere, stock markets are tumbling on disappointment over the Fed. The FOMC minutes, to recap, indicated that the Framework Review was not yet complete and that discussions over forward guidance were ongoing. The minutes also suggested that for now and in this environment, yield curve targeting wasn't going to be in play as a policy tool. Policymakers also noted that any further "substantial improvement" in the labour market would depend on a "broad and sustained" reopening of business activity. In Asia today, the PBoC refrained from trimming the benchmark lending rate for corporate and household loans, which was largely as expected but still led to disappointment in some narratives after the central bank injected fresh liquidity through its medium-term lending facility on Monday. Just to note, Apple yesterday become the first publicly listed U.S. company to reach a $2 tln market capitalisation.

    [EUR, USD]
    EUR-USD has remained heavy, coming within 1 pip of yesterday's post-minutes three-day low at 1.1830. The dollar, meanwhile, has retained demand in the wake of the FOMC minutes, the bottom line from which was that there is no immediate plan to take unconventional stimulus measures in monetary policy. The narrow trade-weighted USD index edged out a three-day peak at 93.09, extending the rebound that was sparked by the minutes and from the 27-month low that was pegged on Wednesday at 92.13. The FOMC minutes, to recap, indicated that the Framework Review was not yet complete and that discussions over forward guidance were ongoing. The minutes also suggested that for now and in this environment, yield curve targeting wasn't going to be in play as a policy tool. Policymakers also noted that any further "substantial improvement" in the labour market would depend on a "broad and sustained" reopening of business activity. There is a case for an optimistic take on the U.S. economic prospects based on the outside-mainstream view that the coronavirus will fizz out -- as all new coronavirus and flu strains have done throughout history once herd immunity has built up. The key metrics to look at are not flurries of positive results from flawed PCR testing but actual ICU admissions and mortalities. Already in Europe, which is further along the Gompertz curve of the SARS Cov-2 coronavirus outbreak, advocates of the 'feardemic' are having an increasingly hard time (sometimes comedic) explaining the widening reality gap between positive PCR testing and the continued stark lack of corresponding real public health events (ICU admissions and deaths).

    [USD, JPY]
    USD-JPY whittled out a three-day peak at 106.21, despite posting only a 22-pip range. AUD-JPY, which is widely seen as a forex barometer of investor appetite in global asset markets, ebbed to an eight-day low at 75.99. The yen 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 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 has printed a six-day low at 1.3065, extending the sharp correction from yesterday's eight-month peak at 1.3268. The pound has in the meanwhile seen a down-then-up price action against the euro, with EUR-GBP posting a high at 0.9068 before reversing to near 0.9020, recouped intraday losses against the yen and is showing a 0.5% gain on the underperforming Australian dollar. We have been taking a circumspect view of the pound's upside potential. The jump in July inflation data hasn't materially affected the BoE policy outlook, other than diminish the possibility of negative interest rates. We also take the view that trade discussions may not be going as well as has been publicly indicated recently by the UK prime minister's spokesperson. 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 for the UK government. It is also understood that Brussels is hoping that the UK will buckle in its demands on this front under the pressure of deadline, which will be October's EU leaders' summit, which at the least will keep the uncertainty going until then. 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 rotated higher yesterday, which produced a two-month high at 1.0853 and about a half-a-big-figure lift in the trading range of the cross. The gains coincided with a strong risk-on vibe in global markets as Apple reached a $2 tln market capitalization and the S&P 500 and NASDAQ indices scaled to record highs. The franc, an historic low-beta safe-haven currency, periodically correlatives inversely with global stock market direction, along with sentiment about the EU (Switzerland's biggest trading partner). The influence of the SNB's intervening hand may have been at play this week, too. Total Swiss sight deposits of francs have risen by 130 bln since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. 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. EUR-CHF still remains below the seven-month peak that was seen in early June at 1.0921.

    [USD, CAD]
    USD-CAD has remained firm, retaining the underlying bid that was established by yesterday's less dovish than anticipated FOMC minutes. The pair, while perky, has still remained just below yesterday's 1.3228 peak, which marked the culmination of a rebound from a seven-month low at 1.3234. Oil prices, while dipping in the wake of the Fed minutes yesterday, remained in a consolidation near recent five-month highs. The OPEC+ group this week affirmed that there was near full compliance on crude supply quotas among members, which has helped maintain a broad underpinning of crude prices. 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 driving this downtrend, while the U.S. currency waned as a safe haven unit before negative real U.S. yields subsequently become a dominant factor in driving the greenback's downtrend. Upside risks for USD-CAD include the OPEC+ group's course to easing output quotas, which could weigh on oil prices depending how it matches with the evolution in demand, alongside the coronavirus pandemic and geopolitical tensions, should they derail the recovery in global asset markets. There is also a risk that the U.S. dollar stages as broad recovery should the coronavirus continue to fizz out (as all new coronavirus and flu strains have done in history once herd immunity has built up) in the U.S. and globally. Part of the reason for the greenback's recent underperformance was the lockdown impact, which lagged those seen in Europe and other parts of the world.

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