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By XE Market Analysis July 13, 2020 4:58 am
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    XE Market Analysis: Europe - Jul 13, 2020

    Risk-on positioning has seen the dollar and yen soften in currency markets. The narrow trade-weighted USD index fell below Friday's low at 96.44 on route to 96.39. Last Thursday's one-month low is at 96.24. EUR-USD lifted to a four-day peak at 1.1336. Cable also lifted above its Friday peak in posting a high at 1.2666. USD-JPY posted a sub-20-pip range in the upper 106.00s while the Japanese currency weakened against most other currencies. AUD-USD printed a four-day high at 0.6985. USD-CAD ebbed to a 1.3556 low, extending further from Friday's two-week high at 1.3633. Front-month WTI crude prices have been holding a narrow range near $40.0. In equity markets, the MSCI Asia-Pacific index printed a five-month peak while S&P 500 futures have risen by more than 0.5%. Markets are betting that the upcoming Q2 corporate earnings reports will beat lowered expectations, and that global economies will avoid blanket lockdowns despite localised spikes in new coronavirus infections. And despite media reports of "surging" new Covid-19 cases, and the social-psychological and political pressure surrounding how the issue of the pandemic, a cool look at the data shows that the coronavirus is no where near as devastating as feared earlier in the year. Based on the data, even if every person in the world were to contract the virus, only one in 105 would die, and of these the median age would be over 80, while the vast majority would recover without complications.

    [EUR, USD]
    EUR-USD lifted to a four-day peak at 1.1336 as the narrow trade-weighted USD index fell below Friday's low at 96.44 on route to 96.39. Last Thursday's one-month low is at 96.24. 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, which has been a theme in global data releases since the April lockdown nadir, the pace of recovery is now likely to fall back. Markets are 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.

    [USD, JPY]
    USD-JPY posted a sub-20-pip range in the upper 106.00s while the Japanese currency weakened against most other currencies amid a backdrop of rallying equity 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. Geopolitical issues remain wildcards. 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 lifted above its Friday peak in posting a high at 1.2666. The pound has been on the outperforming list of currencies over the last couple of weeks. Market narratives have been talking up the technical/momentum case for being bullish of the UK currency, with Cable's 200-day moving average at 1.2698 being highlighted as target by some. We're not too confident that the pound will continue higher this week. The government's extra GBP 30 bln for the fiscal pot, announced last week and which brings the total crisis-response fund to GBP 160 bln, was largely as expected, and is now priced in markets. The latest round of trade negotiations between the UK and EU ended early for a second consecutive week due to "significant differences," as EU chief negotiator Barnier put it. This is a disappointment after a parliamentary transcript came to light earlier last week of a meeting between the Lords Select Committee and Barnier, which hinted that the EU may be contemplating a compromise on its fisheries position. There had also been other reports suggesting that "landing zones" on difficult issues were coming into view. Trade talks will continue in Brussels this week, and will continue through to month end before resuming in the week of August 17th. The issue is not likely to be resolved until October, the deadline for when an agreement has to be made before the UK's access to the single market terminates at year end. As for the coronavirus in the UK, the metrics have been continuing to improve and the UK economy is back to near fully reopen status, though retail spending and total electricity use still remain well off pre-pandemic levels.

    [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 ebbed to a 1.3556 low, extending further from Friday's two-week high at 1.3633. Improved risk appetite in global markets has given the Canadian dollar, and other commodity-correlating currencies a lift, while seeing the U.S. dollar soften, although oil prices are steady. Front-month WTI crude prices have been holding a narrow range so far today, near $40.0. We take a neutral view on oil prices at present. While global demand looks to be flattening out following the sharp recovery from the April lockdown nadir, supply is remaining tight. The OPEC+ group are maintaining supply quotas, while U.S. output has fallen from 13.0 mln bpd to 10.5 mln bpd. Last Friday's weekly Baker-Hughes U.S. oil rig count fell an additional 4 rigs, marking the 17th straight week of decline.

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