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By XE Market Analysis August 26, 2020 4:08 am
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    XE Market Analysis: Europe - Aug 26, 2020

    Narrow ranges have been prevailing among the main currencies, with market participants hunkering down ahead of Fed Chairman Powell's keynote Jackson Hole address on Thursday (which will be a virtual affair this year). Global stock markets have steady, after Wall Street produced yet further record highs for the S&P 500 and NASDAQ. Markets are anticipating a dovish lean from Powell, although there is a risk for disappointment in terms of how much he can signal given the FOMC hasn't yet completed its Policy Framework Review. Any sense of disappointment could catalyse a rebound phase in the dollar, which has been trending lower since March. The dollar posted modest gains into the London interbank open today, while the yen recouped losses seen during the early Tokyo session. While USD-JPY flatlined near the 106.50 mark, EUR-JPY eked out a nine-day high at 126.15 before ebbing back under 126.00. AUD-JPY clocked a one-month peak, and GBP-JPY a two-week high, before both crosses ebbed back. EUR-USD ebbed from the mid 1.1800s to the lower 1.1800s. USD-CAD posted a two-day low at 1.3159 before lifting back above 1.3180. The Canadian dollar was buoyed yesterday by a rally in crude prices as a hurricane disrupted oil production in the Gulf of Mexico. Front-month WTI futures hit a five-month peak at $43.57 yesterday, since settling moderately lower. AUD-USD has seen a narrow range near 0.7200, although still edging out a five-day high at 0.7207. Cable has been directionless, holding near 1.3150, while EUR-GBP has rooted near 0.9000.

    [EUR, USD]
    EUR-USD ebbed from the mid 1.1800s to the lower 1.1800s. Market participants are hunkering down ahead of Fed Chairman Powell's keynote Jackson Hole address on Thursday (which will be a virtual affair this year). A dovish lean from Powell is widely anticipated, although there is a risk for disappointment in terms of how much he can signal given the FOMC hasn't yet completed its Policy Framework Review. Any sense of disappointment could catalyse a rebound phase in the dollar, which has been trending lower since March. EUR-USD has been up-trending since March, from sub-1.0650 levels. Downside momentum has been waning in recent weeks, although still producing new 27-month highs. Last week was the first down week the pair has seen out of the last nine weeks. A sustained correction is looking increasingly likely. The U.S. is clearly through the worst of the pandemic, the economy is rebounding, albeit no firing on all cylinders, Wall Street is on an record-breaking winning streak, and Treasury yields have perked up in recent sessions.

    [USD, JPY]
    USD-JPY has been flatlining near the 106.50 mark, while EUR-JPY eked out a nine-day high at 126.15 before ebbing back under 126.00, and AUD-JPY clocked a one-month peak. Most yen crosses have been trending higher since May, with the Japanese currency tracking inversely with global stock market direction. 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 low-beta haven currency.

    [GBP, USD]
    Cable has been directionless, holding near 1.3150, while EUR-GBP has rooted near 0.9000. The pound, along with the other main European currencies, have broadly outperformed their peers in recent sessions, though Cable still remains well off recent eight-month highs. Various arguments are out there. One is that Europe has come through the coronavirus pandemic well: all-cause mortalities in most countries and the region in general continue to trend below long-term averages, and while the 'casedemic' and associated media-driven 'feardemic' continue, there remains no corresponding spike in clinical illness, ICU admissions and/or deaths. This is allowing economic activity to pick up. The German finance minister said yesterday there were signs that the pace of Germany's recovery is beating forecasts, while the prelim August PMI data out of the UK produced a solid above-forecast 60.3 reading in the composite headline, signalling strong expansion in private-sector activity. Markets are for now also taking a sanguine view of the flop-out in last week's trade talks between the EU and UK. All things Brexit go down to the wire, and expectations for any real progress are low until much nearer the deadline, which is widely accepted as being the EU's leaders' summit in October. The consensus view is that a deal will be struck. We retain a wary view. There are grounds to doubt there can be anything other than a narrow deal, given the intransigence on the EU's level-playing-field rules and fishing rights. A bear-bones or a no-deal outcome are a risk. Regional UK governments also remain somewhat trigger happy with regard to implementing localized lockdown measures in response rises in new coronavirus cases, and this might get worse going into the winter, the season of contagious respiratory illness. 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.

    [USD, CHF]
    EUR-CHF has reversed the gains seen last Wednesday in falling back to, and settling in, the mid 1.0700s, down from the two-month high that was pegged 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 last 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 posted a two-day low at 1.3159 before lifting back above 1.3180. The Canadian dollar was buoyed yesterday by a rally in crude prices as a hurricane disrupted oil production in the Gulf of Mexico. Front-month WTI futures hit a five-month peak at $43.57 before settling moderately lower. 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. Any disappointment to the dovish expectations that market participants have with regard to Fed Chair Powell's keynote speech tomorrow, which we think is possible given the fact that the FOMC hasn't completed its Policy Framework Review, could also spark a rebound in the U.S. dollar.

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