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By XE Market Analysis July 23, 2020 4:46 am
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    XE Market Analysis: Europe - Jul 23, 2020

    The dollar has continued to track lower, despite a backdrop of flagging stock markets in Asia, although U.S. equities closed with moderate gains yesterday and S&P 500 futures are showing a modest rise in overnight trading. The narrow trade-weighted USD index (DXY) printed a fresh four-and-a-half-month high at 94.82, drawing in on the early March low at 94.66, which was the lowest level seen since August 2018. EUR-USD has been buoyant, though has remained below the 21-month high that was printed yesterday at 1.1601. The pair is amid its fifth week of an accelerating rally phase, underpinned both by broader dollar weakness (amid shifting risk premia in global markets) and broader euro outperformance (on the back of the EU recovery fund, seen as reducing Eurozone breakup risk while creating a new liquid AAA fund that will attract foreign investment). The common currency has been gaining against most other currencies recently, outside the case against the outperforming commodity currencies. The research team at Goldman Sachs is anticipating a further 10% gain in the euro. EUR-JPY has seen a similar price action to EUR-USD today, in holding off yesterday's seven-week peak. Other euro crosses have also been steady. Elsewhere, USD-JPY has continued to ply a narrow range near the 107.00 level. Cable remained buoyant, settling in the lower 1.2700s, below Tuesday's six-week high at 1.2768. The pound has been trading more mixed against other currencies. AUD-USD has settled near 0.7150, so far holding below the 15-month high seen yesterday at 0.7183. A sharp drop in Australia's Q2 business confidence survey had been widely anticipated, as was a downbeat economic update of the Federal government. USD-CAD posted a fresh six-week low at 1.3378, with the Canadian dollar firming concomitantly with oil prices. Front-month WTI futures lifted back above $42.0, drawing back in on Tuesday's four-and-a-half-month high at $42.40. Geopolitics remain a concern. China blacked out English premier league games on Chinese television, and closed the U.S. consulate in Chengdu in retaliation for the White House closing the Chinese consulate in Houston.

    [EUR, USD]
    EUR-USD has been buoyant, though has remained below the 21-month high that was printed yesterday at 1.1601. The pair is amid its fifth week of an accelerating rally phase, underpinned both by broader dollar weakness (amid shifting risk premia in global markets) and broader euro outperformance (on the back of the EU recovery fund, seen as reducing Eurozone breakup risk while creating a new liquid AAA fund that will attract foreign investment). The common currency has been gaining versus most other currencies recently, outside the case against the outperforming commodity currencies. The research team at Goldman Sachs is anticipating a further 10% gain in the euro. EUR-JPY has seen a similar price action to EUR-USD today, in holding off yesterday's seven-week peak. Other euro crosses have also been steady. A downside risk for EUR-USD would be any rekindling in sustained risk aversion in global markets, which would likely generate safe haven demand for dollars.

    [USD, JPY]
    USD-JPY has continued to ply a narrow range near the 107.00 level. The yen has against other currencies, particularly the commodity units, has been underperforming. 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 remained buoyant, settling in the lower 1.2700s, below Tuesday's six-week high at 1.2768. The pound has been trading more mixed against other currencies following a bout of underperformance yesterday on the Brexit news. To recap, the UK's Telegraph 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 concurrently 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 got the blame for the slow progress in discussions with the U.S.. The reports seem to have a ring of truth, even allowing for the possibility that the government might be trying to put on a show to the EU -- a negotiating tactic that signals it isn't bluffing about leaving the single market without a new trade deal. This would mean the UK is heading for trade on WTO terms, which would cast less favourable terms on much of the UK's international trade from January 1st next year. The spectre of this should render the pound apt to appearing on the underperforming list of currencies, especially with the UK economy lagging relative to peers in the recovery from lockdown.

    [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 posted a fresh six-week low at 1.3378, with the Canadian dollar firming concomitantly with oil prices. Front-month WTI futures lifted back above $42.0, drawing back in on Tuesday's four-and-a-half-month high at $42.40. 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 costly large-scale lockdowns won't been needed. The deterioration in U.S-China relations also remains a potential concern.

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