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By XE Market Analysis July 9, 2020 3:53 am
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    XE Market Analysis: Europe - Jul 09, 2020

    The dollar weakened as risk-on positioning ensued. The narrow trade-weighted USD index printed a one-month low at 96.24. An ongoing surge in China stock markets, which has been accompanied by gains in the yuan, have continued to drive a glass-half-full sentiment in global markets. The Shanghai Composite equity index has now risen by 16% over the last eight sessions, its longest winning streak in more than two years. The MSCI Asia-Pacific index concurrently posted a near five-month peak. As the dollar ebbed, EUR-USD posted a one-month high at 1.1371, adding to an acceleration in what has now been a three-week phase of gains. EUR-JPY, also amid a third consecutive week of ascent, printed a peak at 121.98, which is 2 pips shy of Monday's three-week high. The common currency has also firmed up against other currencies, including the commodity-correlating units, though has remained off recent highs. The EU's progress towards a EUR 750 bln recovery fund has been supporting the euro in recent weeks. Cable printed a three-week high at 1.2644. USD-JPY, down for a second day, carved out a new low for the month at 107.18, though the yen still weakened against most other currencies. EUR-JPY is up, while the risk-sensitive AUD-JPY cross edged out a two-day high. USD-CAD settled in a narrow range in the lower 1.3500s, above the 16-day low that was seen yesterday at 1.3491. Front-month WTI crude futures edged out a two-day high at $40.80, remaining in a broader consolidation phase after the post-lockdown rally peaked at a three-and-a-half-month high at $41.63 in late June. Gold prices rose above $1800 for the first time since 2011, a culmination of a 40% gain since May last year, with more recent gains reflecting safe haven demand due to persisting uncertainties about the economic outlook as a consequence of the coronavirus pandemic. The demand for the zero-yielding asset also reflects concerns that the flood of central bank monetary stimulus may at some point spark a surge in inflation.

    [EUR, USD]
    EUR-USD posted a one-month high at 1.1371, adding to an acceleration in what has now been a three-week phase of gains. EUR-JPY, also amid a third consecutive week of ascent, printed a peak at 121.98, which is 2 pips shy of Monday's three-week high. The common currency has also firmed up against other currencies, including the commodity-correlating units, though has remained off recent highs. The EU's progress towards a EUR 750 bln recovery fund has been supporting the euro in recent weeks. The multiannual financial framework fund, to use the correct terminology, has been taken as a positive step in recent 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. EU heads of state are expected to meet at the end of next, where an agreement on the details on the recovery fund is expected. Any upset on this front would be a negative for the euro. We take a circumspect view of EUR-USD's upside potential, given the risks of setbacks on the road back to economic normalcy. While there has been an abundance in above-forecast data out of the Eurozone and elsewhere of late, which has been a theme in global data releases since the April lockdown nadir, the pace of recovery is now likely to fall back. This especially looks to be the case given the problematic clusters of outbreaks of new coronavirus infections, which have been causing localised lockdowns across the world. Markets may thus 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.

    [USD, JPY]
    USD-JPY, down for a second day, carved out a new low for the month at 107.18, though the yen still weakened against most other currencies. EUR-JPY is up, while the risk-sensitive AUD-JPY cross edged out a two-day high. 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, despite outward appearances, 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 been an outperformer over the last week and a half. Cable today printed a three-week high at 1.2644, while EUR-GBP has remained heavy since posting a three-week low at 0.8964 on Tuesday. Signs that both the UK and EU are committed to reaching a trade deal, along with the UK government's detailing of fiscal support measures yesterday, which were dominated by measures to boost employment, including a big cut in sales tax for the reopening hospitality sector and a cut in the transaction tax for residential properties, have helped given the UK currency an underpinning. The total worth of the UK budget package is about GBP 30 bln, which is about 1.5% of annual GDP. On the Brexit front, a parliamentary transcript came to light this week of a meeting between the Lords Select Committee and the EU's chief negotiator, Barnier, which hinted that the EU may be contemplating a compromise on its fisheries position with the UK. Fisheries have proven to be a key sticking point in negotiations. Trade discussions will continue throughout July, 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 (on a trade deal) before the end of the month. This has for now offset negative leads for the pound, including reports that the BoE has been talking with commercial banks to prepare them for the possibility of negative interest rates. 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, along with developments on the UK-EU trade front.

    [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 settled in a narrow range in the lower 1.3500s, above the 16-day low that was seen yesterday at 1.3491. Front-month WTI crude futures edged out a two-day high at $40.80, remaining in a broader consolidation phase after the post-lockdown rally peaked at a three-and-a-half-month high at $41.63 in late June. 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 tomorrow. 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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