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By XE Market Analysis July 7, 2020 4:20 am
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    XE Market Analysis: Europe - Jul 07, 2020

    The dollar has settled moderately higher after drifting lower yesterday. This came with stock markets in Asia, ex-China, along with U.S. equity futures, having corrected a portion of yesterday's rally. The MSCI Asia-Pacific stock index corrected from yesterday's four-and-a-half-month peak, which was the culmination of a 7% rally over a five-day period. The main Chinese indices still managed to post fresh highs amid signs that Beijing is mobilizing a bull run in its domestic markets. The narrow trade-weighted USD index lifted to levels near 96.90, up from the 13-day low seen yesterday at 96.57. EUR-USD settled around the 1.1300 level, down from yesterday's two-week high at 1.1346. Cable likewise settled off its Monday peak. AUD-USD, after clocking a fresh one-month high at 0.6998 during the Sydney morning session, turned lower to a 0.0.6946 low. USD-CAD rose to a four-day peak at 1.3572, rebounding from Monday's two-week low at 1.3518. Front-month WTI crude futures printed a four-day low at 40.10, putting in a little distance from the two-week peak of yesterday, at $41.08. In news and developments, Fed's Bostic said that the U.S. recovery may be "levelling off" while Melbourne in Australia has commenced a six-week lockdown due to a spike in coronavirus cases there. The RBA maintained unchanged monetary policy settings at its policy review today, as had been widely anticipated, stressing that fiscal and monetary support will be required "for some time" while repeating its pledge to scale up QE if necessary. The central bank refrained from signalling out the Australian dollar as being too strong, which some in markets had speculated on.

    [EUR, USD]
    EUR-USD settled around the 1.1300 level, down from yesterday's two-week high at 1.1346. The narrow trade-weighted USD index lifted to levels near 96.90, up from the 13-day low seen yesterday at 96.57. EUR-JPY settled lower after pegging a three-week high yesterday. Both the dollar and yen firmed up today after weakening during yesterday's rally in global asset markets, which have mostly turned lower today. More above-forecast data came in from the Eurozone yesterday, with both May retail sales figures and the July Sentix investor confidence index surpassing expectations, which has been a theme in global data releases since May. 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.

    [USD, JPY]
    USD-JPY has lifted back above 107.50 amid a generally buoyant dollar, while the yen has lifted against the likes of the euro and commodity currencies, such as the Australian dollar. 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]
    The pound has traded mixed so far this week, up on the dollar and yen but lower against the euro, Australian dollar and other currencies. Cable posted a four-day high at 1.2521, though the UK currency has ebbed against the euro, with EUR-GBP lifting out of Friday's 18-month low at 0.9003 to a six-day high. May and June data out of the UK, including yesterday's release of the June construction PMI survey (which showed the sector returning to expansion), have been indicating a strong rebound from the April nadir, 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, especially with social distancing rules having been relaxed and with pubs and restaurants reopening. 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, with 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, which has been taken by forex markets a negative for the pound.

    [USD, CHF]
    EUR-CHF has fallen back in recent 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 has risen to a four-day peak at 1.3572, rebounding from Monday's two-week low at 1.3518. Weakness in the Canadian dollar tracked a decline in oil prices, with front-month WTI crude futures printing a four-day low at 40.10, putting in a little distance from the two-week peak of yesterday at $41.08. 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. On the Canadian domestic front, the June employment report will be released on Friday. We are expecting a 700k headline gain after the 289.6k jump in May, with the unemployment rate seen ebbing to 11.0% from 13.7% in May.

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