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By XE Market Analysis August 24, 2020 4:06 am
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    XE Market Analysis: Europe - Aug 24, 2020

    Narrow ranges have been prevailing in early-week trading. EUR-USD has been consolidating losses seen last week after the pair hit a 27-month peak at 1.1967, holding today near the 1.1800 level, up on Friday's pull-back low at 1.1754. Last week, while producing a new trend high, was the first down week EUR-USD has seen out of the last nine weeks. The pair has been trending higher from the sub-1.0650 lows that were printed in March. USD-JPY, meanwhile, has posted a sub-25-pip range so far today, holding in the mid-to-upper 105.00s. The pair has been trending lower since early June, from levels near 110.00, reflecting broad dollar weakness over this period, with the Japanese currency losing ground to other currencies, including the euro and Australian dollar, during this time. The yen's general weakness has been concomitant with risk appetite coursing through global markets, fuelled by massive fiscal and monetary efforts worldwide in response to the disruptions causes by the pandemic-induced lockdowns. Cable has settled near the 1.3100 mark after dropping quite sharply from last Wednesday's eight-month high at 1.3269. Last week's trade talks between the EU and UK were a flop, which weighed on the pound on Friday. USD-CAD ebbed to a five-day low at 1.3155, returning last week's seven-month low at 1.3133 back into scope. The Canadian dollar lifted after oil prices jumped nearly 50 cents at the Asia-Pacific open as markets factor potential oil production disruption in the Gulf of Mexico as two major hurricanes bear down. The Kiwi dollar has been little affected by a new record low in New Zealand's 10-year bond yield, nor by news that Auckland's lockdown has been extended for another week. In other news, Japanese PM Abe is reportedly receiving treatment for a "chronic illness." There were also reports that North Korea's Kim Jong Un is in a coma (beware, similar rumours have in the past proven to be been false). The Bank of Korea said it will be making significant down revisions to growth projections as a consequence of the pandemic. The FT reports, citing three sources, that the Trump administration is planning to bypass normal U.S. regulatory standards and grant "emergency use authorization" of the the Oxford University/AstraZeneca SARS Cov-2 vaccination in October (ahead of the November presidential election).

    [EUR, USD]
    EUR-USD has been consolidating losses seen last week after the pair hit a 27-month peak at 1.1967, holding today near the 1.1800 level, up on Friday's pull-back low at 1.1754. Last week, while producing a new trend high, was the first down week EUR-USD has seen out of the last nine weeks. The pair has been trending higher from the sub-1.0650 lows that were printed in March. The softer dollar thesis continues to dominate in markets, as it has since mid May, although momentum appears to have waned in recent weeks as Wall Street equity indices hit record highs. It was just last Tuesday that the S&P 500 finally topped the February 19 high, fully recovering from the COVID-19 collapse to the March 23 low of 2237. The NASDAQ continued its stellar run, hitting a record level for the 36th time this year. Much stronger than expected new home sales and Markit PMI numbers supported optimism on the recovery, as did hopeful news on a vaccine. The FT reports, citing three sources, that the Trump administration is planning to bypass normal U.S. regulatory standards and grant "emergency use authorization" of the the Oxford University/AstraZeneca SARS Cov-2 vaccination in October (ahead of the November presidential election). The strength of the U.S. economic rebound and the record-breaking rally on Wall Street is challenging to the bearish dollar view in markets, although real Treasury yields remain deep in negative territory with the market continuing factor in a shift in the FOMC's inflation strategy, to be outlined by Chair Powell at this Thursday's Jackson Hole speech on the Policy Framework Review. On the euro side of the balance, 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 has posted a sub-25-pip range so far today, holding in the mid-to-upper 105.00s. The pair has been trending lower since early June, from levels near 110.00, reflecting broad dollar weakness over this period, with the Japanese currency losing ground to other currencies, including the euro and Australian dollar, during this time. The yen's general weakness has been concomitant with risk appetite coursing through global markets, fuelled by massive fiscal and monetary efforts worldwide in response to the disruptions causes by the pandemic-induced lockdowns. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. 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, although not the dollar. As for the dollar, markets have been running with a bearish view, partly hinged on real U.S. Treasury yields having dropped sharply into negative terrain (on the view that the Fed will shift to a strategically more tolerant stance on inflation, which has started to perk up in the U.S. as a consequence of stimulus measures). The political dithering over a new fiscal recovery program on Capitol Hill, and fact that substantial parts of the U.S. (the more southern states) has been affected by the pandemic at a later stage to some key peers, such as Europe, have also been parts of the weakening dollar hypothesis. The advent of the EU's 750 bln recovery fund (which has reduced the perceived odds for the union to breakup while offering international investors a new AAA fund) has been in the mix as a bullish EUR-USD factor, too.

    [GBP, USD]
    Cable has settled near the 1.3100 mark after dropping quite sharply from last Wednesday's eight-month high at 1.3269. Last week's trade talks between the EU and UK were a flop, which weighed on the pound on Friday. EU chief negotiator, to recap, said that he was "disappointed, concerned and surprised," while his UK counterpart, Frost, accused the EU of being "unnecessarily difficult." This chimes with what a well-connected UK journalist of The Sun tabloid reported earlier last week, that there was "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. Fishing rights is another seemingly insurmountable sticking point. 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 will at the least keep uncertainty going until then. Given the risks of a no deal, or only a narrow deal, we are wary about the pound's outlook. Incoming data have included above-forecast July retail sales and August preliminary PMI figures, with the latter inflated by a government stimulus scheme to boost the restaurant and pub business, which will expire at the end of the month. We 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 an 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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