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By XE Market Analysis July 14, 2020 4:00 am
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    XE Market Analysis: Europe - Jul 14, 2020

    The dollar is firmer relative to levels prevailing at the London close yesterday. Wall Street closed lower, and while U.S. equity index futures have rebounded some today, Asian markets have declined, although Chinese and other markets pared losses following data showing unexpected strength in China's June import and export data (which rose by 2.7% y/y and 0.5% y/y, respectively, versus median forecasts for -10.0% and -1.5%). New lockdown measures in California in the U.S., along with simmering U.S.-China tensions, particularly the Trump administrations motions towards restricting Chinese firms from accessing U.S. capital markets, have been weighing on investor sentiment. EUR-USD has settled in the low-to-mid 1.1300s after retreating from yesterday's 1.1375 peak. Cable has carved out a six-day low at 1.2537, which has been partly a product of sterling underperformance following a much weaker than expected UK May GDP figure (which showed 1.8% m/m growth versus the median forecast for 5.5%). EUR-GBP concurrently lifted to a one-week peak at 0.9046, and GBP-JPY traded into four-day low terrain. USD-JPY maintained a narrow range, though still managed to eke out a five-day high at 107.36. Most yen crosses remained within their respective Monday ranges. AUD-USD edged out a four-day low at 0.6927 before lifting moderately on the back of China's trade figures, a data series that the Australian currency is particularly sensitive too, China being Australia's biggest export client. USD-CAD has rallied to a two-week high at 1.3647, concomitantly with front-month WTI crude futures printing a four-day low at $39.19. Ahead today, data included Germany's June investor confidence survey and U.S. June CPI data, neither of which are likely to have much bearing on forex markets.

    [EUR, USD]
    EUR-USD has settled in the low-to-mid 1.1300s after retreating from yesterday's 1.1375 peak. 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 has so far today maintained a narrow range, although still managed to eke out a five-day high at 107.36. Most yen crosses remained within their respective Monday ranges. 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 has carved out a six-day low at 1.2537, which has been partly a product of sterling underperformance following a much weaker than expected UK May GDP figure (which showed 1.8% m/m growth versus the median forecast for 5.5%). EUR-GBP concurrently lifted to a one-week peak at 0.9046, and GBP-JPY traded into four-day low terrain. The pound had been on the outperforming list of currencies over the last couple of weeks. We haven't been 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 brought 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. There had also been other reports suggesting that "landing zones" on difficult issues were coming into view, though reports that the UK government is considering free ports and competitive tax cuts suggests that EU is unlikely to agree anything other than a narrow trade deal with the UK. Trade talks will continue in Brussels this week

    [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 rallied to a two-week high at 1.3647, concomitantly with front-month WTI crude futures printing a four-day low at $39.19. We are taking a neutral-to-bearish view on oil prices, and by correlative association the Canadian dollar. Global demand looks to be flattening out following the sharp recovery from the April lockdown nadir, while there is a chance supply might increase. The OPEC+ group have been maintaining pandemic-era supply quotas, though will reportedly be considering increasing them at its meeting this week. Any increase in supply from the group would likely offset, or more than offset, the drop in U.S. production, which has been stricken by viability issues (with costly U.S. shale operations needing prices to be at $50-$55 for break-even).

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