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By XE Market Analysis July 30, 2020 4:27 am
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    XE Market Analysis: Europe - Jul 30, 2020

    The dollar has managed a rebound from post-Fed lows, with the narrow trade-weighted USD index lifting above 93.50 after pinning a fresh 25-month low at 93.18. Fed Chairman Powell gave an unambiguously strong commitment to continued ultra-accommodative policy ("not even thinking about thinking about thinking raising rates"), though there were no changes in terms of the 0%-0.25% rate band, QE, or hints on forward guidance. USD-JPY recouped to a two-day high at 105.29 after printing a five-month low at 104.76 in the wake of the Fed. The pair's recovery today in Asia has been concomitant with rallying stock markets, which has fostered a rotation out of safe haven positions in the Japanese currency. The yen still remains among the currency outperformers this week, alongside the euro and pound. EUR-USD ebbed back to the mid 1.1700s after printing a new 22-month peak at 1.1805. Cable sank back under 1.2950 after peaking at 1.3013, which is the loftiest level seen since the pre-lockdown days of early March. The commodity currencies stand out for underperforming today, despite the backdrop of mostly higher stock markets in Asia, which underscores the profit taking theme in forex markets after a phase of shorting dollars into the FOMC. Both AUD-USD and NZD-USD have racked up declines of over 0.6%, with the former pegging a two-day low at 0.7132 after peaking at a 15-month high at 0.7196 in the wake of the Fed announcement. USD-CAD lifted by 0.5% in posting a two-day high at 1.3404. Oil prices have continued to ply a narrow range off recent five-month highs. Gold prices retreated after making a fresh nominal record high yesterday at $1,974.90. S&P 500 futures have dropped by 0.6% in overnight trading after the cash version of the index closed on Wall Street yesterday with a 1.2% gain. Focus in the U.S. now switches to the final phase of political wrangling over the next fiscal package. Concerns about the impact of localized lockdown measures, particularly in the U.S.

    [EUR, USD]
    EUR-USD ebbed back to the mid 1.1700s after printing a new 22-month peak at 1.1805. The dip reflects a rebound in the dollar from yesterday's post-Fed announcement lows, with the narrow trade-weighted USD index lifting above 93.50 after pinning a fresh 25-month low at 93.18. Fed Chairman Powell gave an unambiguously strong commitment to continued ultra-accommodative policy ("not even thinking about thinking about thinking raising rates"), though there were no changes in terms of the 0%-0.25% rate band, QE, or hints on forward guidance, which left speculative participants in profit taking mood after building up substantial short positions into the Fed's policy review. Focus in the U.S. now switches to the final phase of political wrangling over the next fiscal package. Concerns about the impact of localized lockdown measures, particularly in the U.S., also remain, though the rate of new coronavirus cases appears to be stabilizing, falling by 2% last week, which fits the Gompertz curve of respiratory virus outbreaks. The coronavirus data show a death rate of about 1 in 2000 and average age of mortalities of over 80, which is, for all the media hype, much more benign than was been feared back in March when the now infamous Imperial College model (used by politicians to justify lockdowns) was forecasting 2.2 mln deaths in the U.S. and over 20 mln globally. In Europe there are a number of localized spikes in new virus cases, which is causing much commotion and new travel restrictions, though such bumps have been seen before, such as Sweden in June, which at the time invited much derision from the WHO and many in the media as the country never went lockdown and where most people don't ware masks, only for the rate of new cases to retreat back to a classic Gompertz curve profile, which strongly implies an increasingly level of herd immunity. Both Sweden and Europe's overall all-cause mortality rates are currently trending below long-term averages. As for EUR-USD, we retain a bullish stance, anticipating a visit of the 1.2000 level.

    [USD, JPY]
    USD-JPY recouped to a two-day high at 105.29 after printing a five-month low at 104.76 in the wake of the Fed announcement yesterday, which saw Chair Powell give a strong commitment to continued ultra-accommodative policy. The low was seen as the dollar dropped across-the-board, while the recovery today in Asia has been seen as stock markets rallied, which fostered a rotation out of safe haven positions in the Japanese currency. The yen still remains among the currency outperformers this week, alongside the euro and pound. The Japanese currency is likely to remain apt to directional change on the back of shifting risk premia in global markets. 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 recently 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 reputation as a reliable haven currency.

    [GBP, USD]
    Cable sank back under 1.2950 after peaking at 1.3013, which is the loftiest level seen since the pre-lockdown days of early March. Sterling has been in the outperforming lane over the previous couple of days, though still registers as the weakest of the main currencies on the year-to-date, and by some distance in trade-weighted terms, while recent dollar underperformance has been somewhat flattering the pound. Nevertheless, there are some convincing bullish arguments in market narratives. One is the pick-up in the pace of economic recovery in the UK, as evidenced by the much stronger than forecast preliminary July PMI data (outperforming Eurozone PMIs and showing the private sector to be back in expansion for the first time since lockdown) and the CBI's July distributive sales report, which flagged a near full recovery in the retail sector (by rising to a +4 headline, up from -37 in June and the best reading since April last year, with sales in upcoming months seen at near seasonal norms). There has also been signs that have led markets to factor improved odds for a EU-UK trade deal. An FT article this week asserted that the EU is willing to drop its demand that the UK accepts EU state-aid rules and oversight of the ECJ (European Court of Justice), and that "while further work is needed, a middle ground is clearly emerging". This followed a Reuters report earlier in the week that EU trade negotiator Barnier believes UK PM Johnson wants a deal, despite the UK government's often repeated assertion that it's willing to take the UK out of the single market at year-end without a new trade deal if it doesn't get what it wants. We see scope for Cable returning to levels around the 1.3500 mark.

    [USD, CHF]
    The Swiss franc has steadied at firmer levels after dropping quite sharply against the euro on Monday, which reflected broad outperformance of the common currency and, possibly, the added influence of the SNB's intervening hand. Weekly sight deposit figures out of Switzerland have been suggesting that the central bank has been continuing to sell francs regularly, as it has been since the consequences of the pandemic took a grip on markets, which had the impact of increasing demand for the Swiss currency. A rise in sight deposits (money held by commercial banks) can suggest francs turning up after being sold by the central bank. EUR-CHF made a rare appearance on the 'biggest daily mover' list out of the main dollar pairings and associated cross rates on Monday, rising by over 1% at intraday highs. A seven-week high was pegged at 1.0841. The seven-month peak, seen in early June, is at 1.0921. The advent of the EU's recovery fund, seen as a milestone by many analysts (a new liquid AAA fund that also reduces Eurozone breakup risks) has by many accounts caused a re-weighting of the common currency in portfolios.

    [USD, CAD]
    USD-CAD lifted by 0.5% in posting a two-day high at 1.3404, recouping from the seven-week lows seen earlier in the week. Profit taking of U.S. dollar shorts, built up into the Fed's policy review this week, has been the theme today. Oil prices have continued to ply a narrow range off recent five-month highs. The Canadian dollar will likely remain hostage to fluctuations to the U.S. dollar and oil prices. Downside risks for the Canadian dollar include the OPEC+ group's course to easing output quotas, which could weigh on oil prices, alongside the coronavirus pandemic and geopolitical tensions, should they derail global asset markets.

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