Home > XE Currency Blog > XE Market Analysis: Europe - Jul 03, 2020

AD

XE Currency Blog

Topics7392 Posts7437
By XE Market Analysis July 3, 2020 4:15 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5316
    XE Market Analysis: Europe - Jul 03, 2020

    Little change on the forex front, with the main dollar pairings and crosses holding within their respective Thursday ranges. The dollar itself consolidated its post-payrolls gains, while stock markets in Asia-Pacific extended the rally in global asset markets following the affirmation of a solid employment rebound in the U.S. in June. The narrow trade-weighted USD index (DXY) settled just below yesterday's 97.34 high, which was the culmination from the rally from its nine-day low at 96.81. EUR-USD concurrently held just above yesterday's 1.1122 low, which was the culmination of the drop from the nine-day high that was seen at 1.1304. Cable settled in the mid-to-upper 1.2400s, down on yesterday's nine-day peak at 1.2531. Both AUD-USD and NZD-USD registered intraday gains, but both pairings have remained below their respective Thursday highs. USD-CAD eked out a two-day low at 1.3551, but remained short of Wednesday's nine-day low at 1.3543. In oil markets, front-month WTI crude futures are down about 1% near $40.0, having turned lower from Thursday's 10-day peak at $40.75. The MSCI Asia-Pacific equity index printed a four-month high, and China's Shanghai composite a 14-month peak after the Caixin June services PMI for China showed the quickest growth pace in a decade. S&P 500 futures are showing modest gains in low volumes. Market narratives are highlighting plenty of caveats with regard to the strong U.S. jobs report. One is the simple fact is that the jobs market has still only recovered a third of the 20.8 mln job contraction seen in April. Another is the more timely jobless claims report showing a 59.0k rise in claims. And then there is the issue of the surge in new coronavirus cases, which has led to the re-introduction of lockdown measures in several states. Then there is the issue of the approaching fiscal time bomb, with expanded jobless benefits set to expire at the end of July. Finally, there is the issue of simmering China-U.S. tensions.

    [EUR, USD]
    EUR-USD has held just above yesterday's 1.1122 low, which was the culmination of the drop from the nine-day high that was seen at 1.1304. The low was a product of dollar strength following yesterday's U.S. payrolls report, which followed the affirmation of a solid employment rebound in June. The narrow trade-weighted USD index (DXY) has settled just below yesterday's 97.34 high, which was the culmination from the rally from its nine-day low at 96.81. Market narratives are highlighting plenty of caveats with regard to the strong U.S. jobs report. One is the simple fact is that the jobs market has still only recovered a third of the 20.8 mln job contraction seen in April. Another is the more timely jobless claims report showing a 59.0k rise in claims. And then there is the issue of the surge in new coronavirus cases, which has led to the re-introduction of lockdown measures in several states. Then there is the issue of the approaching fiscal time bomb, with expanded jobless benefits set to expire at the end of July. Finally, there is the issue of simmering China-U.S. tensions. Markets are likely to remain 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 been taken as a positive step in analysts commentaries, being a hinge factor of some recent bullish euro calls, on the basis of it reducing eurozone breakup risk while creating a new liquid and higher-yielding AAA asset, which will attract inflows from real money investors and reserve managers. 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, and which in turn should keep the dollar prone to bouts of outperformance. Note that U.S. markets will be closed today for the Independence Day holiday.

    [USD, JPY]
    The yen took a rotation low against most other currencies in the wake of the U.S. June jobs report, which confirmed a second month of a strongly rebounding jobs market. USD-JPY, however, has remained steady, holding near the 107.50 mark. Shifting risk premia in global markets looks likely to remain a primary driver of direction for the Japanese 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 reliable reputation as a haven currency. Market participants are grappling with glass-half-empty and glass-half-full arguments. Strong incoming May and June economic data, as economies rebound from the April lockdown nadir, have become increasingly old news, especially amid 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]
    Cable has settled in the mid-to-upper 1.2400s, down on yesterday's nine-day peak at 1.2531, which contributed to sterling's rebound after recent underperformance. The pound had on Monday posted respective one- and three-month lows against the dollar and euro. The new lockdown measures being re-introduced in city of Leicester, due to a spike in coronavirus cases there, is an ominous sign of the challenges being faced as the UK economy reopens, while recent weakness in the pound was 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. Trade negotiations remain in deadlock, with the latest round of talks having ended yesterday, a day earlier than planned, with the EU's chief negotiator Barmier saying, "after four days of discussions, serious divergences remain." There have also been concerns that the BoE is prematurely tapering its QE program. UK data this week showed an unexpected downward revision in final Q1 GDP data, to -2.2% q/q from -2.0% q/q reported initially. As in other economies, focus is 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 sub-1.0 coronavirus infection r-rate. In the weeks and months ahead, we expect the pound to remain more prone to appear on the underperforming list of currencies rather than on the outperforming list. The UK-EU post-Brexit trade issue is not likely to be resolved until October, the deadline for when an agreement has to be made before the UK's access to the single market ends. The risk is that the only a narrow deal, or no deal at all, happens, leaving the UK on much less favourable terms of trade. The pound is running at about a 11-12% trade-weighted discount compared to the average levels in the several years preceding the vote to leave the EU in June 2016.

    [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. 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 a weaker currency. Regarding the SNB, the central bank left policy settings unchanged at its recent quarterly review, 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 remains Swiss policymakers' central policy guidance.

    [USD, CAD]
    USD-CAD eked out a two-day low at 1.3551, but remained short of Wednesday's nine-day low at 1.3543. In oil markets, front-month WTI crude futures are down about 1% near $40.0, having turned lower from Thursday's 10-day peak at $40.75. 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. This backdrop threatens to weigh on, or at least cap, oil prices, along with curtailing the Canadian dollar's upside potential. USD-CAD last week peaked at a one-month high at 1.3716. Support comes in at 1.3484-1.3500, which encompasses the June-23rd three-week low.

    Paste link in email or IM