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By XE Market Analysis July 24, 2020 4:18 am
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    XE Market Analysis: Europe - Jul 24, 2020

    The yen has outperformed today as risk aversion took a firm grip on global markets. The dollar has so far failed to pick up safe haven demand, and has remained on a softening path. The narrow trade-weighted USD index (DXY) carved out a fresh 22-month low at 94.57. The dollar has lost appeal partly on the advent of the EU's recovery fund, seen as a milestone by many analysts that has served to tip the balance out of the dollar's favour, and partly amid expectations for dovish guidance from the Fed at next week's FOMC, with some speculating that the U.S. central bank is considering yield curve targeting. A Reuters survey highlighted increasing pessimism about the nearer-term U.S. outlook given the extent of localized lockdown measures in response to the spike in coronavirus cases across many southern and western states. Intel also underwhelmed markets in its guidance for Q3 earnings. Against this backdrop, EUR-USD remained firm, although off from the 21-moth peak that was seen yesterday at 1.1628. USD-JPY dropped by 0.5% to a one-month low at 106.36. Yen crosses were concurrently weak, driven by safe haven demand for the yen. EUR-JPY fell to a two-day low at 123.36, extending a correction from Wednesday's seven-week peak at 124.30. AUD-JPY has been the biggest mover of the day so far, dropping 0.6% to a three-day low at 75.32. AUD-USD fell by a lesser magnitude, but still managed to peg a three-day low, at 0.7074. USD-CAD lifted to within a pip of its peak from yesterday, at 1.3428. Oil prices have remained heavy after yesterday sinking to three-day lows. Cable edged out a fresh six-week high at 1.2773. The pair has been trending higher for about three weeks, though recent daily price action has been jagged and upside momentum has been waning, with the pound having been weakening against other currencies on signs, and confirmation at a press conference yesterday, that the UK and EU remain deadlocked on key issues in trade talks.

    [EUR, USD]
    EUR-USD remained firm, although off from the 21-moth peak that was seen yesterday at 1.1628. EUR-JPY, in contrast, fell to a two-day low at 123.36, extending a correction from Wednesday's seven-week peak at 124.30. The cross has been driven by safe haven demand for yen today as global asset markets tumble, while EUR-USD has remained buoyed by ongoing dollar weakness. The narrow trade-weighted USD index (DXY) carved out a fresh 22-month low at 94.57. The dollar has lost appeal partly on the advent of the EU's recovery fund, seen as a milestone by many analysts that has served to tip the balance out of the dollar's favour, and partly amid expectations for dovish guidance from the Fed at next week's FOMC, with some speculating that the U.S. central bank is considering yield curve targetting. A Reuters survey highlighted increasing pessimism about the nearer-term U.S. outlook given the extent of localized lockdown measures in response to the spike in coronavirus cases across many southern and western states. Intel also underwhelmed markets in its guidance for Q3 earnings.

    [USD, JPY]
    The yen has outperformed today as risk aversion took a firm grip on global markets. USD-JPY dropped by 0.5% to a one-month low at 106.36. Yen crosses were concurrently weak, driven by safe haven demand for the yen. EUR-JPY fell to a two-day low at 123.36, extending a correction from Wednesday's seven-week peak at 124.30. AUD-JPY has been the biggest mover of the day so far, dropping 0.6% to a three-day low at 75.32. A Reuters survey highlighted increasing pessimism about the nearer-term U.S. outlook given the extent of localized lockdown measures in response to the spike in coronavirus cases across many southern and western states. Intel also underwhelmed markets in its guidance for Q3 earnings. U.S.-China tensions are also back at front and centre following the closures of a Chinese consulate in the U.S. and a U.S. consulate in China, and with U.S. Secretary of State Pompeo delivering his most belligerent speech against China yet, accusing President Xi of being a "true believer" in international ideology while hammering China on international abuses. This backdrop sent the MSCI Asian-Pacific stock index plunging from six-month highs while driving haven demand for the yen. 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 edged out a fresh six-week high at 1.2773. The pair has been trending higher for about three weeks, though recent daily price action has been jagged and upside momentum has been waning, with the pound having been weakening against other currencies on signs, and confirmation at a press conference yesterday, that the UK and EU remain deadlocked on key issues in trade talks. The latest round of UK-EU trade talks ended yesterday without breakthrough, with both sides reporting that major differences remain on key issues, particularly level playing field rules and fisheries. This is hardly surprising to anyone keeping tabs on this issue, especially in light of the unnamed government sourced articles in the Telegraph and FT earlier this week that expressed the UK government's pessimism about the scope for reaching a deal. The UK's chief negotiator David Frost said that it's now clear that a deal in principle won't be reached by the end of July, which had been Prime Minister Johnson's aim, and each side is doubling down in accusing the other of not being amenable to compromise. Negotiations will continue next week in London, which will be the final round before the summer recess. The deadline for reaching a deal before the UK leaves the single market at year-end is October (to allow time for political ratifications and a myriad of technical issues to be completed), and things aren't likely to get interesting until then. With a the possibility of a sans deal exit from the single market hanging in the air, the pound's upside potential is likely to remain muted.

    [USD, CHF]
    EUR-CHF has recently lifted from levels near 1.0600 to levels above 1.0700, 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 lifted to within a pip of its peak from yesterday, at 1.3428. Oil prices have remained heavy after yesterday sinking to three-day lows. The Canadian dollar will likely remain hostage to fluctuations in oil prices. Concerns about the impact of localized lockdown measures in the U.S. and the marked deterioration in U.S. and Western relations with China are currently weighing on oil prices and other asset markets. This has offset this week's green-lighting of the 750 bln euro EU recovery fund, and the continued 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 in play. 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, along with geopolitical tensions.

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