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By XE Market Analysis August 25, 2020 4:07 am
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    XE Market Analysis: Europe - Aug 25, 2020

    Most dollar pairings have remained well within their ranges from yesterday, though the dollar and yen saw mild weakness against most other currencies, outside the cases against the New Zealand and Canadian dollars. Wall Street clocked fresh record highs for the S&P 500 and NASDAQ yesterday. PE ratios are stretched, but trend following, index tracking and the float of massive global stimulus are driving shares higher, creating a reality gap with fundamental value. Some good news came from the U.S. and China on the Phase 1 trade deal, too, with China's commerce ministry reporting "constructive dialogue" after the U.S. Treasury stated that "both sides see progress." Spirits have also been lifted by developments of COVID-19 treatments and vaccinations. Against this backdrop, EUR-USD has been plying a narrow range near 1.1800, moderately up on Monday's New York closing level. USD-JPY whittled out a four-day high at 106.08, reflective of mild yen underperformance amid the risk-on environment. Cable lifted slightly, reaching a 1.3116 intraday high before settling back below 1.3100, remaining comfortably within the range seen yesterday. Ditto for AUD-USD, with pair modestly up on the day, while NZD-USD bucked the trend in ebbing to a five-day low at 0.6515. Lockdown measures and a new record lows in NZ 10-year bond yield have been weighing on the Kiwi dollar. The Canadian dollar has also been on an underperforming streak, with USD-CAD posting a five-day peak at 1.3240. Oil prices have settled, having not sustained gains seen yesterday, despite concerns of disruption to oil production facilities and distribution in the Gulf of Mexico as hurricanes bear down. Crude market narratives have highlighted analyst concerns about flagging demand due to ongoing lockdown measures around the world. The U.S. dollar's five-month weakening trend, meanwhile, looks to be losing momentum. The U.S. is clearly through the worst of the pandemic, the economy is rebounding, and Treasury yields have perked up in recent sessions despite an expected dovish lean from Fed Chair Powell at his keynote address this Thursday.

    [EUR, USD]
    EUR-USD has been plying a narrow range near 1.1800, moderately up on Monday's New York closing level. The pair's five-month rally out of sub-1.0650 levels of mid March has been losing momentum. Last week was the first down week out of the last nine weeks, although still producing new 27-month peak. We anticipate a correction. The U.S. is clearly through the worst of the pandemic, the economy is rebounding, and Treasury yields have perked up in recent sessions despite an expected dovish lean from Fed Chair Powell at his keynote address this Thursday.

    [USD, JPY]
    USD-JPY whittled out a four-day high at 106.08, reflective of mild yen underperformance amid the risk-on environment. Wall Street clocked fresh record highs for the S&P 500 and NASDAQ yesterday, while the MSCI Asia-Pacific neared two-year highs. PE ratios are stretched, especially for the big tech stocks which have been leading the rally, but trend following, index tracking and the float of massive global stimulus are driving shares higher, creating a reality gap with fundamental value. Some good news came from the U.S. and China on the Phase 1 trade deal, too, with China's commerce ministry reporting "constructive dialogue" after the U.S. Treasury stated that "both sides see progress." Spirits have also been lifted by developments of COVID-19 treatments and vaccinations. 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.

    [GBP, USD]
    Cable lifted slightly, reaching a 1.3116 intraday high before settling back below 1.3100, remaining comfortably within the range seen yesterday. EUR-GBP has been re-established back above 0.9000 after rebouding from Friday's six-week low at 0.8942, which reflected a broader weakening in the UK currency. Last week's trade talks between the EU and UK were a flop, although, with EU chief negotiator proclaiming that he was "disappointed, concerned and surprised" while his UK counterpart accused the EU of being "unnecessarily difficult," smacks of theatrics. Nevertheless, a well-connected UK journalist of The Sun tabloid reported 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 can be assumed 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. This will keep the uncertainty going until then. Given the risks of a no deal, or only a narrow deal, we are wary about the pound's outlook. 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 an upward jolt to the unemployment rate, with the aviation, high street retail and hospitality sectors to be hard hit. The UK calendar is quiet until for the remained of the month.

    [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]
    The Canadian dollar has also been on an softening streak, with USD-CAD posting a five-day peak at 1.3240. Oil prices have settled, having not sustained gains seen yesterday, despite concerns of disruption to oil production facilities and distribution in the Gulf of Mexico as hurricanes bear down. Crude market narratives have highlighted analyst concerns about flagging demand due to ongoing lockdown measures around the world. In the bigger view, 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 fuelling 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. With the U.S. economy recouping and Treasury yields perking up, the U.S. dollar may also be set for a rebound after a prolonged phase of weakening.

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