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By XE Market Analysis August 21, 2020 4:03 am
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    XE Market Analysis: Europe - Aug 21, 2020

    The dollar's weakening bias has resurfaced, pushing the narrow trade-weighted USD index (DXY) to a two-day low at 92.58, extending the correction from yesterday's one-week high at 93.23. The 27-month low that was seen on Tuesday is at 92.13, and the index will need to close out today in New York below 93.10 to rack this week up as the eighth down week out of the last nine weeks. The softer dollar thesis continues to dominate in markets, as it has since mid May, and was bolstered yesterday by worse-than-forecast weekly initial claims and August Philly Fed manufacturing data, along with an ebb back in Treasury yields as participants recovered from their disappointment about Wednesday's Fed minutes. While the minutes showed that the FOMC has no immediate plan to take unconventional stimulus measures in monetary policy, there is a realization in market narratives that the Fed is clearly going to retain its uber-accommodative stance for years, whether it's formalized or not. EUR-USD edged to a two-day peak at 1.1883, extending the rebound from yesterday's one-week low at 1.1802. Cable also climbed to a two-day high, at 1.3255, drawing back in on Wednesday's eight-month peak at 1.3269. The pound is up on the euro and other currencies, too. EUR-GBP fell to a near six-week low at 0.8960, extending a sharp retreat from yesterday's 0.9070 high. Above-forecast UK retail sales data today helped, while the risk-on backdrop in global markets is generally being seen as a positive for the pound, which had underperformed notably during the worse of the market carnage back in March. The UK's prime minister's office has this week sent out positive vibes on the prospects for a trade deal being reached with the EU, although, according to some sourced media reports, this may belie continue large differences on the key areas of fishing and EU level-playing-field rules. USD-JPY printed a two-day low at 105.56, as did USD-CAD, at 1.3157. The latter pairing's seven-month low is at 1.3134.

    [EUR, USD]
    EUR-USD edged to a two-day peak at 1.1883, extending the rebound from yesterday's one-week low at 1.1802. The rebound reflects as resurfacing of the dollar's weakening bias, which pushed the narrow trade-weighted USD index (DXY) to a two-day low at 92.58, extending the correction from yesterday's one-week high at 93.23. The 27-month low that was seen on Tuesday is at 92.13, and the index will need to close out today in New York below 93.10 to rack this week up as the eighth down week out of the last nine weeks. The softer dollar thesis continues to dominate in markets, as it has since mid May, and was bolstered yesterday by worse-than-forecast weekly initial claims and August Philly Fed manufacturing data, along with an ebb back in Treasury yields as participants recovered from their disappointment about Wednesday's Fed minutes. While the minutes showed that the FOMC has no immediate plan to take unconventional stimulus measures in monetary policy, there is a realization in market narratives that the Fed is clearly going to retain its uber-accommodative stance for years, whether it's formalized or not. The advent of the EU's 750 bln recovery fund has been leading to an upward shift in portfolio weightings, which has been a factor in EUR-USD's gains from sub-1.1000 levels.

    [USD, JPY]
    USD-JPY printed a two-day low at 105.56 amid a resumption in broad dollar weakening, which has been concomitant with a drop back in Treasury yields following the upward blip in the wake of Wednesday's release of the latest FOMC minutes. 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 climbed to a two-day high, at 1.3255, drawing back in on Wednesday's eight-month peak at 1.3269. While broad dollar weakness has been at play, the pound is also up on the euro and other currencies, too. EUR-GBP fell to a near six-week low at 0.8960, extending a sharp retreat from yesterday's 0.9070 high. Above-forecast UK retail sales data today helped, while the risk-on backdrop in global markets is generally being seen as a positive for the pound, which had underperformed notably during the worse of the market carnage back in March (with the UK being exposed due to its large current account deficit and open economy). The UK's prime minister's office has this week sent out positive vibes on the prospects for a trade deal being reached with the EU, although, according to some sourced media reports, this may belie continue large differences on the key areas of fishing and EU level-playing-field rules. 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, and 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 has reversed the gains seen on Wednesday in falling back to the mid 1.0700s, down from the two-month high at 1.0853. The high had 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 should 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 fell to a two-day low at 1.3157, drawing back in on the seven-month low seen on Wednesday at 1.3134. A broader retreat in the U.S. dollar and a near $1.50 rebound in oil prices yesterday have combined to weigh on the pairing. Oil prices remain 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, helping maintain a broad underpinning of crude prices, along with an overall risk-on theme in global markets. 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.

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