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By XE Market Analysis July 8, 2020 4:52 am
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    XE Market Analysis: Europe - Jul 08, 2020

    The dollar majors have been plying narrow ranges so far today, with global markets generally in somewhat of a directional stasis presently, with participants mindful of the potentially economically disrupting new waves and clusters of coronavirus infection outbreaks in reopening economies. There is also conjecture that even if the coronavirus remains reasonably contained, that the rapid pace of the rebound out of the April nadir will taper substantially over the coming months, which in forex markets may curtail the post-March upward bias in currencies with higher beta characteristics, such as the Australian dollar and other commodity-correlating units. Market participants are also looking for progress to be made in the EU on the EUR 750 bln recovery fund. EU heads of state are expected to meet at the end of next, where an agreement on the details is mostly expected. Any upset on this front would be a negative for the euro. In the UK today, the government will be presenting a budget update, where a range of targeted measures to tackle rising unemployment are expected. We don't anticipate much positive impact on the pound given concurrent speculation that the BoE is gearing up for, or at least preparing the way for, negative interest rates. There have been reports that the BoE has been in contact with commercial lenders to warn them about this possibility. UK-EU trade discussions will continue throughout July, as was confirmed yesterday, and then recommence in the week of August 17th following the summer recess. There has been some speculation that the two sides might make a political declaration of intent (to making a trade deal) before the end of the month, though so far there has been little sign of this.

    [EUR, USD]
    EUR-USD has settled near 1.1300. More above-forecast data came in from the Eurozone this week, which has been a theme in global data releases since the April lockdown nadir. The pace of recovery is now likely to fall back, especially amid problematic clusters of outbreaks of new coronavirus infections, which have been causing localised lockdowns across the world. Markets this 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. EU heads of state are expected to meet at the end of next, where an agreement on the details is mostly expected. Any upset on this front would be a negative for the euro.

    [USD, JPY]
    USD-JPY has settled in a directionless stasis in the mid 107.00s while some yen crosses have edged fresh lows today amid a second day of sputtering price action in most stock markets. 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 yesterday took a rotation higher against the dollar and euro, along with most other currencies. Confirmation that UK-EU trade discussions will continue throughout July, and then recommence in the week of August 17th following the summer recess, along with some speculation that the two sides might make a political declaration of intent (to making a trade deal) before the end of the month, were taken as a bullish cue by the forex market. The UK government will also be presenting a budget update today, where a range of targeted measures to tackle rising unemployment are expected. These factors have for now offset negative leads, including reports that the BoE has been talking with commercial banks to prepare them for the possibility of negative interest rates. Incoming 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 have been re-introduced in city of Leicester, due to a spike in coronavirus cases there; 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. We presently take a net neutral view on the pound. Cable will likely remain hostage to the ebb and flow of risk appetite in global markets.

    [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 edged out a six-day high at 1.3624, extending the rebound from Monday's 15-day low at 1.3518. The turn higher in the pair has been concomitant with a turn lower in oil prices, with front-month WTI crude futures having turned moderately softer after posting a 15-day high at $41.08 on Monday. This has weighed on the Canadian dollar and other oil-correlating currencies. 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. We have been pencilling in a revisit of USD-CAD one-month high at 1.3716. Support comes in at 1.3484-1.3500, which encompasses the June-23rd three-week low. As for the oil price outlook, we take a neutral view at present. While global demand looks to be flattening out, supply is looking to remain tight. The OPEC+ group are maintaining supply quotas, while U.S. output has fallen from 13.0 mln bpd to 10.5 mln bpd. 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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