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By XE Market Analysis July 6, 2020 4:18 am
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    XE Market Analysis: Europe - Jul 06, 2020

    Currencies have been trading in a risk-on formation, which has meant underperformance in the dollar and yen and outperformance in the Australian dollar. A 5% surge in the main blue chip stock indices in China, which propelled the Shanghai Composite index to a five-year high, led a broader rise in other asset markets. Derestricting travel and the success in stemming the coronavirus spread have featured in market narratives about the outperformance in Chinese equities, which has come on the back of mostly above-forecast June economic data out of the major economies last week. There are also sensible arguments that all-cause mortality and "excess deaths" statistics show that the coronavirus has not been anywhere near as impactful as feared earlier in the year, and in fact are not out of kilter with long running trends, even in Sweden, which didn't lockdown, and other in nations that had relatively lax lockdown implementation. In currencies, the narrow trade-weighted USD index (DXY) ebbed 0.3% to a four-day low at 96.89, which is 8 pips short of last week's 12-day low. EUR-USD concurrently rose 0.4% to a four-day peak at 1.1293. Despite broad dollar softness, yen underperformance floated USD-JPY to a five-day high at 107.78. EUR-JPY, AUD-JPY and NZD-JPY all posted gains of over 0.5%. AUD-JPY outperformed with gains of over 0.7%, making a one-month peak at 75.12. AUD-USD lifted by just over 0.5% in seeing a two-week high at 0.6976, while NZD-USD lifted into one-month territory. USD-CAD fell to a two-week low at 1.3521. Front-month WTI futures posted a less than 50 cent range, though still managed to edge out a four-day high at $40.67. Cable posted a four-day high at 1.2505, while EUR-GBP lifted out of Friday's 0.9003 18-month low to a five-day high at 0.9041.

    [EUR, USD]
    EUR-USD rose 0.4% in posting a four-day peak at 1.1293, driven by a broadly softer dollar. The narrow trade-weighted USD index (DXY) concurrently ebbed 0.3% to a four-day low at 96.89, which is 8 pips short of last week's 12-day low. EUR-JPY, meanwhile, lifted by over 0.5% into three-week high terrain, with the yen, like the dollar, underperforming amid a risk-on backdrop in global markets on Monday. Markets look 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.

    [USD, JPY]
    The yen has declined amid a backdrop of rallying global stock markets, led by a 5% surge in the main blue chip stock indices in China, which propelled the Shanghai Composite index to a five-year high. Derestricting travel and the success in stemming the coronavirus spread have featured in market narratives about the outperformance in Chinese equities, which has come on the back of mostly above-forecast June economic data out of the major economies last week. There are also sensible arguments that all-cause mortality and "excess deaths" statistics show that the coronavirus has not been anywhere near as impactful as feared earlier in the year, and in fact are not out of kilter with long running trends, even in Sweden, which didn't lockdown, and other in nations that had relatively lax lockdown implementation. 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 posted a four-day high at 1.2505, while EUR-GBP lifted out of Friday's 0.9003 18-month low to a five-day high at 0.9041. May and June data out of the UK, as elsewhere, have showed a strong rebound from April, when the coronavirus lockdown measures were in full force. However, the path ahead looks to be a rocky one. 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. Concerns also remain about the risk of the UK leaving it transitory membership of the EU's single market at year end and shifting to trade on less-favourable WTO terms. Trade negotiations remain in deadlock, with the latest round of talks having ended last Thursday, a day earlier than planned. The EU's chief negotiator Barmier saying, "after four days of discussions, serious divergences remain." There is also a prevailing view in that the BoE might be prematurely tapering its QE program. As in other economies, the primary focus is now on the r-rate of new coronavirus infections amid the de-restricting in social and economic activity. The UK's hospitality industry reopened on Saturday, which along with a halving in the government's two-metre social distancing guideline, will present a challenge to maintaining a sub-1.0 coronavirus infection r-rate.

    [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 fell to a two-week low at 1.3521. Front-month WTI futures posted a less than 50 cent range, though still managed to edge out a four-day high at $40.67. The sharp rebound in oil demand from the April nadir has been priced in, with focus now on the coronavirus infection rate as economies reopen, which has caused some areas around the world to re-introduce lockdown measures. This backdrop threatens to weigh on, or at least cap, oil prices, along with curtailing the Canadian dollar's upside potential. A revisit of USD-CAD one-month high at 1.3716 looks likely. Support comes in at 1.3484-1.3500, which encompasses the June-23rd three-week low. Canada releases its June employment report this Friday.

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