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By XE Market Analysis August 27, 2020 3:40 am
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    XE Market Analysis: Europe - Aug 27, 2020

    The dollar has retained a softening tone, though ranges have been narrow. Markets are anticipating a dovish lean from Fed Chair Powell's keynote Jackson Hole speech today. Wall Street yesterday produced fresh record highs for the S&P 500 and NASDAQ, though the main U.S. index futures are lower in overnight trading while most Asia stock markets have beaten a retreat. EUR-USD edged out a three-day high at 1.1850 on dollar weakening, though subsequently receded to a 1.1825 low, maintaining a narrow range for a fourth consecutive day. Cable edged out a six-day high at 1.3224, while AUD-USD lifted to an eight-day peak at 0.7251, returning focus to the 18-month high that was seen last week at 0.7276. USD-CAD recouped above 1.3160 after yesterday printing a fresh seven-month low at 1.3130, which was seen concomitantly with oil prices foraying further into five-month high territory due to storm-disrupted crude production in the Gulf of Mexico. USD-JPY saw a three-day low at 105.81 before rebounding back above the 106.00 level, which roughly marks the midway point of the range seen over the last couple of weeks. EUR-JPY edged out a two-day low at 125.28, while AUD-JPY, in contrast, lifted to a five-week high at 76.83, so an mixed performance for the yen in the context of overall narrow ranges. Regarding Powell, there is a risk markets will be disappointed as he may not yet be in a position to deliver in terms of specifics on inflation targeting changes or other policy rubrics. The FOMC hasn't completed its framework review, and there are known differences of opinion among Committee members. Any sense of disappointment would likely catalyze a rebound in the dollar.

    [EUR, USD]
    EUR-USD edged out a three-day high at 1.1850 on dollar weakening, though subsequently receded to a 1.1825 low, maintaining a narrow range for a fourth consecutive day with market participants hunkering down ahead of Fed Chairman Powell's keynote Jackson Hole address today. 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 trending higher from sub-1.0650 levels that were seen back in March. Upside 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 printed a three-day low at 105.81 before recouping back above the 106.00 level, which roughly marks the midway point of the range seen over the last couple of weeks. EUR-JPY edged out a two-day low at 125.28, while AUD-JPY, in contrast, lifted to a five-week high at 76.83. Overall, a mixed performance for the yen in relatively narrow ranges. Wall Street produced fresh record highs for the S&P 500 and NASDAQ yesterday, though the main U.S. index futures are lower in overnight trading while most Asia markets retreated as Fed Chair Powell's keynote Jackson Hole speech today looms up. The expectation is for a dovish signal, though there is a good reason to expect that he may not deliver in terms of specifics on inflation targeting changes or other policy rubrics with the FOMC not having completed its framework review. In the bigger picture, 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 profile of being a low-beta haven currency.

    [GBP, USD]
    Cable edged out a six-day high at 1.3224 on the back of a broadly softer dollar. Among the mix of forces affecting the pound is the reopening UK economy, allowed by the fact that the coronavirus has ceased to be public health event in terms of causing severe illness and associated hospitalizations and deaths. This being the case, regional UK governments remain somewhat trigger happy with regard to implementing localized lockdown measures in response to rises in new cases, and we can assume that this will only get worse going into the winter, the season of contagious respiratory illness. Meanwhile, on the Brexit front, markets are for now 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 are wary. 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 deal or a no-deal outcome are a risk. Another risk is that 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 wage support scheme protected about 9.5 mln jobs at the height of the lockdown, though there remains up to 1.5 mln jobs at risk of being chopped in October, unless the government extends its support scheme (as Germany did with its plan yesterday).

    [USD, CHF]
    EUR-CHF has settled back to narrow range trading in the mid 1.0700s having failed to sustain gains seen last week, which produced a two-month high at 1.0853. The influence of the SNB's intervening hand may have been at play. 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 recouped above 1.3160 after yesterday printing a fresh seven-month low at 1.3130, which was seen concomitantly with oil prices foraying further into five-month high territory due to storm-disrupted crude production in the Gulf of Mexico. In the bigger picture, 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. The still unfolding coronavirus pandemic and geopolitical tensions are also on the radar, 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 today, 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, too.

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