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By XE Market Analysis July 31, 2020 3:59 am
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    XE Market Analysis: Europe - Jul 31, 2020

    The dollar continued lower in what is now the biggest monthly decline the U.S. currency has seen in a decade. The narrow trade-weighted USD index printed a fresh 26-month low at 92.59, the culmination of a 5% decline from the finishing level in June and marking just over a 10% drop from the highs seen in early March. U.S. Treasury yields have printed fresh lows, with the 30-year bond in record low territory, extending declines seen since yesterday's release of U.S. Q2 GDP data, which came in at a dismal -32.9% y/y, although this met the consensus expectation. President Trump's Tweeted suggestion that the presidential election in November should be postponed has also been in the mix, added a political element to arguments that the pandemic has precipitated a further erosion in the dollar's reserve currency status. The EU's recently greenlighted recovery fund is also seen as a first step in shared fiscal responsibility in the Eurozone, which by all accounts has triggered a re-weighting of euros in currency portfolios at the expense of the dollar. Gold prices have lifted to back within a couple of dollars of the record nominal high seen earlier in the week at $1,974.90. EUR-USD, amid its sixth consecutive week of accelerating gains, has pegged a fresh 26-month high at 1.1908. Cable pinned a new five-month peak, at 1.3143. USD-JPY posted a five-month low at 104.19. AUD-USD saw a 17-month high at 0.7228. USD-CAD has been an exception to the U.S. dollar weakening theme, with the pairing consolidating in the lower 1.3400s after making a nine-day high at 1.3461 yesterday. The Canadian dollar has been affected by a the drop in oil prices over the last day. Front-month WTI crude futures hit a three-week low on Thursday at $38.72, and while since recouping to levels near $40.0, remain down by over 2.5% from week-ago levels. Data out of Asia today were highlighted by encouraging July PMI survey data out of China, and an above-forecast 2.7% m/m rise in Japanese production.

    [EUR, USD]
    EUR-USD, amid its sixth consecutive week of accelerating gains, has pegged a fresh 26-month high at 1.1908. The latest up phase reflects continued broad dollar declines in what is now the biggest monthly decline the U.S. currency has seen in a decade. The narrow trade-weighted USD index printed a fresh 26-month low at 92.59, the culmination of a 5% decline from the finishing level in June and marking just over a 10% drop from the highs seen in early March. U.S. Treasury yields have printed fresh lows today, with the 30-year bond in record low territory, extending declines seen since yesterday's release of U.S. Q2 GDP data, which came in at a dismal -32.9% y/y, although this met the consensus expectation. President Trump's Tweeted suggestion that the presidential election in November should be postponed has also been in the mix, added a political element to arguments that the pandemic has precipitated a further erosion in the dollar's reserve currency status. The EU's recently greenlighted recovery fund is also seen as a first step in shared fiscal responsibility in the Eurozone, which by all accounts has triggered a re-weighting of euros in currency portfolios at the expense of the dollar. 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. In Europe, localized bumps in new cases and led to some new travel restrictions, though the reopening process remains largely intact. For EUR-USD, we have been anticipating a visit of the 1.2000 level.

    [USD, JPY]
    USD-JPY posted a five-month low at 104.19, driven by dollar weakness. The yen has traded softer, meanwhile, against the likes of the euro and Australian dollar, with a paring in stock market losses on many Asian bourses, and a gain in U.S. equity index futures, lifting safe haven pressure from the Japanese currency. Data out of Asia today were highlighted by encouraging July PMI survey data out of China, and an above-forecast 2.7% m/m rise in Japanese production. 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 pinned a new five-month peak, at 1.3143. The pair is now firmly back in pre-lockdown territory. The UK currency 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 and improvement in the CBI's July distributive sales report, which flagged a near full recovery in the retail sector, 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, with a number of sourced press reports suggesting that discussions are going better than the official line suggests. 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 has been an exception to the U.S. dollar weakening theme, with the pairing consolidating after making a nine-day high at 1.3461 yesterday. The Canadian dollar has been affected by a the drop in oil prices over the last day. Front-month WTI crude futures hit a three-week low on Thursday at $38.72, and while since recouping to levels near $40.0, remain down by over 2.5% from week-ago levels. 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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