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By XE Market Analysis July 22, 2020 4:15 am
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    XE Market Analysis: Europe - Jul 22, 2020

    The euro, along with the Aussie and Kiwi dollars, posted fresh highs against the dollar and yen, despite a backdrop of flagging stock markets. EUR-USD reached its highest level since January 2019, at 1.1547, the culmination of what has now been a five-week rally. EUR-JPY pegged a fresh six-week high at 123.34. Most other euro crosses are also firmer, though remain below recent highs. Cable settled in the lower 1.2700s, below Tuesday's six-week peak at 1.2768. USD-JPY plied a narrow range just above the one-week low seen yesterday at 106.68, while EUR-JPY and the risk-sensitive AUD-JPY scaled to respective six-week highs. GBP-JPY and CAD-JPY, in contrast, remained below their respective six-week highs, which had been printed yesterday. AUD-USD reached a new 15-month peak at 0.7153, while NZD-USD ascended further into 18-month high territory. USD-CAD settled around the 1.3450 mark, above the six-week low seen yesterday at 1.3422, concomitant with front-month WTI oil futures settling below the three-and-a-half month peak that was left at $42.40 yesterday. Gold and silver prices have continued to surge, reflecting investors' expectation for global monetary stimulus taps to remain open and the dollar to remain weak. The gains in the non-yielding assets also reflect concerns that inflation might spike as a consequence of the stimulus. In news, the UK's Telegraph newspaper reported that the UK government is pessimistic about reaching a trade deal with the EU, just days before Prime Minister Johnston's end-of-July deadline for reaching a deal in principle. The FT also reported, citing unnamed senior government officials, that the UK government has abandoned hopes for reaching a trade deal with the U.S. before the presidential election in November, which means that there will be zero hope for a deal by the time Britain leaves the EU's single market at the end of the year. The pandemic gets the blame for the slow progress.

    [EUR, USD]
    The euro posted fresh highs against the dollar and yen. EUR-USD reached its highest level since January 2019, at 1.1547, the culmination of what has now been a five-week rally. EUR-JPY pegged a fresh six-week high at 123.34. Most other euro crosses are also firmer, though remain below recent highs. Expectations about the EU recovery fund, and now confirmation that leaders agreed on it, has been 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 would attract inflows from real money investors and reserve managers. A downside risk for EUR-USD would be any rekindling in risk aversion in global markets, which would likely drive the pair lower on the back of safe haven demand for dollars.

    [USD, JPY]
    USD-JPY plied a narrow range just above the one-week low seen yesterday at 106.68, while EUR-JPY and the risk-sensitive AUD-JPY scaled to respective six-week highs. GBP-JPY and CAD-JPY, in contrast, remained below their respective six-week highs, which had been printed yesterday. 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 (a reflection of this was the 2-year UK yield this week dipping below Japan's 2-year yield for the first time ever), 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.

    [GBP, USD]
    Cable has settled in the lower 1.2700s, below Tuesday's six-week peak at 1.2768. The pound has so far been unaffected by news from the Brexit front. The UK's Telegraph newspaper has today reported that the UK government is pessimistic about reaching a trade deal with the EU, just days before Prime Minister Johnston's end-of-July deadline for reaching a deal in principle. The FT also reported, citing unnamed senior government officials, that the government has abandoned hopes for reaching a trade deal with the U.S. before the presidential election in November, which means that there will be zero hope for a deal by the time Britain leaves the EU's single market at the end of the year. The pandemic gets the blame for the slow progress. If these reports are right (and it must be said that they do have a ring of truth about them), then the UK is looking likely to be heading for trade on WTO terms, which would render less favourable terms on much of the UK's external business transactions. We are currently taking a bearish view of the pound.

    [USD, CHF]
    EUR-CHF has recently lifted from levels near 1.0600 to levels above 1.0750, benefiting from broader euro gains as markets anticipated EU leaders green-lighting the proposed EUR 750 bln EU recovery fund. This has helped the cross to continue 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 had increased 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, leading 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 settled around the 1.3450 mark, above the six-week low seen yesterday at 1.3422, concomitant with front-month WTI oil futures settling below the three-and-a-half month peak that was left at $42.40 yesterday. Oil, and by association the Canadian dollar, and other oil-correlating currencies, had been boosted recently by a broader risk-on theme in global markets, although that has waned today. The green-lighting of the 750 bln euro EU recovery fund, the progress the U.S. Congress is making on a fresh fiscal package (that is looking likely to be reached in the first week of August), which is likely to amount to between $1 tln and $1.5 tln. Australia and other nations have also, or are working on, new fiscal support measures, aimed in part to replace "first wave" support responses to the pandemic. Positive trial results in several of the leading coronavirus vaccine candidates have also been lifting risk appetite in asset markets, giving higher beta commodity currencies buoyancy. Downside risks for the Canadian dollar include the OPEC+ group's course to easing output quotas, which could weigh on oil prices. The coronavirus remains a risk, too, should fresh outbreaks lead to widespread lockdowns, though its looking increasing likely that large-scale lockdowns won't been needed. The deterioration in U.S-China relations also remains a potential concern.

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