Home > XE Currency Blog > XE Market Analysis: Europe - Jul 01, 2020

AD

XE Currency Blog

Topics7392 Posts7437
By XE Market Analysis July 1, 2020 4:41 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5316
    XE Market Analysis: Europe - Jul 01, 2020

    The dollar has been trading neutrally while the yen has firmed up after initially posting fresh lows amid a bout of selling at the Tokyo fixing today. The yen's demand was safe haven related, being concomitant with a backdrop of flagging stock markets in the Asia-Pacific region. The Nikkei 225, for instance, closed with a 0.75% loss, while South Korea's KOPSI also finished in the red, though other markets, including in China and Australia managed gains. S&P 500 futures were showing a 0.3% decline as of the early London session. USD-JPY dropped to a 107.57 low after earlier pegging a three-week high at 108.17. AUD-JPY fell back to a 74.11 low after edging out a two-week high at 74.71 during the Sydney morning session. EUR-JPY retreated from a two-week high. The risk-sensitive AUD-USD pairing, meanwhile, edged out a one-week high at 0.6917 in Sydney before tipping back under 0.6900. An above-forecast Caixin manufacturing PMI out of China, which rose to 51.2, compared with the median forecast for 50.5, was initially a risk-sentiment tonic for markets, but this came with the U.S. reporting a its biggest daily spike in new coronavirus cases, along with data showing Japanese business sentiment at its lowest since the 2009 financial crisis, along with a measure of geopolitical tensions on the U.S.-China front. Beijing's passing of its controversial Hong Kong security law, while hardly unexpected, marks a watershed in West-China relations. The editor of China's state-backed Global Times said on Twitter that Beijing will be announcing curbs on U.S. media in China. Regarding the coronavirus, various states in the U.S., the cities of Leicester in the UK and Melbourne in Australia, are among the places that are taking new lockdown measures in response to clusters of new infections. The concern is that new infections will increase over the next month as a consequence of reopening, forcing much bigger areas to follow suit in re-imposing social restrictions.

    [EUR, USD]
    EUR-USD has continued to trade without direction, settling in the lower 1.1200s, well within recent highs and lows. Incoming May and June economic data are further evidencing the strong rebound from the April lockdown trough. The data is being somewhat overlooked by markets with primary focus falling on the infection rate of the coronavirus, amid worries of double-dip recession, or at least a post-rebound growth slump. The U.S. reported its biggest single-day rise in new coronavirus cases. Markets are trapped in a constant state of tweaking risk premia, which for EUR-USD means downside pressure when the dollar gains on safe haven demand, and upside pressure when things are looking more rosy. The EU's proposed EUR 750 bln multiannual financial framework fund has continued to be taken as a positive step in analysts commentaries -- being a hinge factor of recent bullish euro calls at Morgan Stanley and Citi, for instance. Morgan Stanley analysts argued that the EU proposal means that some of the risk premium for EU break-up risk will abate, and that the creation of a new large, liquid and higher-yielding AAA asset will attract inflows from real money investors and reserve managers. The team at MS is forecasting EUR-USD at 1.2000 by Q2 next year. We take a slightly more circumspect view given the risks of setbacks on the road back to economic normalcy, which likely won't be achieved until such time there is a vaccine or effective treatment for the SARS Cov-2 coronavirus, which in turn should keep the dollar prone to bouts of outperformance. Note that U.S. markets will close on Friday for the Independence Day holiday.

    [USD, JPY]
    The yen, after initially posting fresh lows following a bout of selling at and after the Tokyo fixing today, picked up demand, concomitantly with a backdrop of flagging stock markets in the Asia-Pacific region. The Nikkei 225, for instance, closed with a 0.75% loss, while South Korea's KOPSI also finished in the red, though other markets, including in China and Australia managed gains. S&P 500 futures were showing a 0.3% decline as of the early London session. USD-JPY dropped to a 107.57 low after earlier pegging a three-week high at 108.17. AUD-JPY fell back to a 74.11 low after edging out a two-week high at 74.71 during the Sydney morning session. EUR-JPY from a two-week high. Shifting risk premia in global markets has continued to influence the Japanese currency's safe haven premium, which is likely to remain a primary driver of direction for the currency. 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 built up a reputation as a haven currency. Market participants are grappling with glass-half-empty and glass-half-full arguments. There are signs of new waves of coronavirus infections as economies reopen, which has already seen social restrictions being re-introduced in some places, although the overall trend remains to de-restriction. Geopolitical issues remain wildcards, although, on the U.S.-China front, its pretty clear that President Trump values his trade deal with Beijing while at the same time wanting to appear tough on China, five months out from the presidential election. On the glass "half full" side, there is the expectation that the massive stimulus by global central banks is primed to give risk assets a major boost, which in the event would likely see the Japanese currency underperform.

    [GBP, USD]
    The pound has recouped some of its recent declines, which produced one- and three-month lows against the dollar and euro, respectively, earlier in the week. Cable has lifted by over a big figure from its trend low at 1.2251. Recent weakness has largely on concerns about the risk of the UK leaving it transitory membership of the EU's single market at year end and shifting to trading on less-favourable WTO terms. There have also been concerns that the BoE is prematurely tapering its QE program. BoE Chief Economist Haldane spoke yesterday, but didn't dispel this concern, amd nor did his relatively upbeat tone had little impact. UK data yesterday showed an unexpected downward revision in final Q1 GDP data, to -2.2% q/q from -2.0% q/q reported initially. Private consumption dropped 2.9% q/q, exports slumped 13.5% q/q and total business investment, which was initially reported as flat, is now showing a decline of -0.3%, while the current account deficit jumped to a whopping GBP -21.1 bln in the first quarter. The final June UK PMI surveys are up this week. We anticipate the final June UK composite PMI to come in unadjusted, at 47.6 in the headline reading, which would confirm a four-month peak, having lifted markedly from 30.0 in the May headline and extending from April's record low of 13.8. Ahead, further improvement looks likely in July, though the pace of improvement is likely to decline from here. As in other economies, focus will be on the r-rate of new coronavirus infections amid the de-restricting in social and economic activity. The UK's hospitality industry will reopen on July 4th, which along with a halving in government's two-metre social distancing guideline, will present a challenge to maintaining a low coronavirus infection rate. The city of Leicester has been forced to take new lockdown measures due to a spike in new cases there.

    [USD, CHF]
    EUR-CHF has fallen back over the last couple of weeks, though has continued to trade comfortably above the series of lows near 1.0500 that were seen from March through to mid May. Committed SNB intervention prevented the 1.0500 level from being breached over this period, when the consequences of the pandemic increasing bets about a possible breakup of the euro area, and even the EU. However, since the Franco-German backed EU recovery fund gained traction in mid May, these bets have gone sour, which led to a rebound in EUR-CHF. The recovery fund is up for ratification at current EU summit, which concludes tomorrow. Assuming this passes, as looks likely (though its form still remains unclear), this should keep EUR-CHF supported for a while. Further out, the Swiss economy will likely be better able to recover from the pandemic era than the eurozone economy. Along with Swtizerland's massive current account surplus, these are factors that suggest upside potential for EUR-CHF will be limited, regardless of the SNB's desire for weaker franc. Regarding the SNB, the central bank left policy settings unchanged at its quarterly review last week, reaffirming that aggressive intervention will remain the main tool to fight the impact of the coronavirus pandemic on the franc. SNB chief Jordan stressed that the currency remains "highly valued" and repeated that the central bank will continue to sell it as needed. The SNB is now forecasting a contraction in economic activity of 6% this year, the most severe recession since the 1970. The SNB also trimmed inflation forecasts, though it is pretty clear that policymakers are reluctant to go below the current level of -0.75% for the key policy rate. Negative for longer remained Swiss policymakers' central policy guidance.

    [USD, CAD]
    USD-CAD has ebbed to a fresh one-week low at 1.3552, with the Canadian dollar tracking oil prices. Front-month WTI crude futures printed a one-week high at $40.37. Bullish momentum is somewhat soft, and prices remain off the three-month peak that was printed at $41.63 on June 23rd. The sharp rebound in oil demand from the April nadir has been priced in, with focus now on the infection rate as economies reopen, with some areas -- including various states in the U.S., the cities of Leicester in the UK and Melbourne in Australia, among other areas -- being forced to re-start economic-sapping social distancing rules. USD-CAD last week peaked at a one-month high at 1.3716. We don't anticipate the prevailing downdrift to last. Support comes in at 1.3484-1.3500, which encompasses the June-23rd three-week low.

    Paste link in email or IM