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By XE Market Analysis July 10, 2020 4:25 am
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    XE Market Analysis: Europe - Jul 10, 2020

    Risk-on positioning has supported the dollar and yen weighing driving underperformance in commodity and other currencies with a higher beta characteristic. Multiplying coronavirus infections across the U.S. and in other places across the world, including Tokyo, Hong Kong, Melbourne, along with a number of clusters in Europe, have spooked investors. The U.S. reported a new daily record in new coronavirus cases, of 60k. Mobile phone data compiled by Unacast has shown retail visits to have dropped in a number of states where there has been a spike in new Covid-19 cases. News yesterday that the U.S. Supreme Court said that the NYC grand jury could have access to President Trump's tax returns and other financial records had started the risk-off phase that is still prevailing. The S&P 500 equity index closed on Wall Street yesterday 0.8% for the worse, while futures of the index are showing a 0.7% in overnight trading. Asian markets and European index futures have also dropped, including Chinese markets, which ends a retail-driven, Beijing encouraged phase of outperformance. In the currency realm, the narrow trade-weighted USD index lifted on a safe haven bid to a two-day high at 96.92, extending a rebound from yesterday's one-month low at 96.24. EUR-USD concurrently ebbed to a three-day low at 1.1258, extending the correction from yesterday's one-month high at 1.1372. Cable dropped to a two-day low at 1.2572, pulling back from Thursday's 16-day at $1.2671. Despite the dollar gaining versus most currencies, yen outperformance drove USD-JPY 0.3% lower, to a two-week low at 106.89. EUR-JPY fell by 0.5%, and the risk-sensitive AUD-JPY cross declined by 0.7% into nine-day low territory, which registers as the biggest mover out of the main dollar pairings and associated crosses. USD-CAD rose to an 11-day high at 1.3628. Front-month WTI futures fell to an 11-day low at $38.88, extending the correction from the 17-day high seen earlier in the week at $41.63.

    [EUR, USD]
    EUR-USD ebbed to a three-day low at 1.1258, extending the correction from yesterday's one-month high at 1.1372. This came as the narrow trade-weighted USD index lifted on a safe haven bid to a two-day high at 96.92, extending a rebound from yesterday's one-month low at 96.24. Multiplying coronavirus infections across the U.S. and in other places across the world, have spooked investors, giving support to the dollar. We have been taking 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, a theme in global data releases since the April lockdown nadir, the pace of recovery is now likely to fall back. 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. 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. The EU's progress towards a EUR 750 bln recovery fund has been supportive of the euro in recent weeks. The multiannual financial framework fund has been taken as a positive step in recent analyst 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.

    [USD, JPY]
    USD-JPY fell to a two-week low at 106.89. EUR-JPY dropped by 0.5%, and the risk-sensitive AUD-JPY cross declined by 0.7% into nine-day low territory, which registers as the biggest mover out of the main dollar pairings and associated crosses (as of the early London morning session). 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]
    Cable dropped to a two-day low at 1.2572, pulling back from Thursday's 16-day at $1.2671.The pound has been an outperformer this week, with Her Majesty's currency showing gains against the dollar, euro, yen and other currencies. EUR-GBP yesterday hit a three-week low at 0.8946, extending the pronounced drop from the three-month high that was seen last week at 0.9179. Market narratives are talking up the technical/momentum case for being bullish, with Cable's 200-day moving average at 1.2698 being highlighted as target by some. On the bullish side of the equation, there have been 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 while as expected in magnitude, at GBP 30 bln, were dominated by measures to boost employment. These have offset recent reports that the BoE has been sounding out UK commercial lends about the possibility of negative interest rates.

    [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 rose to an 11-day high at 1.3628. Front-month WTI futures fell to an 11-day low at $38.88, extending the correction from the 17-day high seen earlier in the week at $41.63.The WTI oil benchmark remains 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's 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 is up today. 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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