Home > XE Currency Blog > XE Market Analysis: Europe - Sep 03, 2020

AD

XE Currency Blog

Topics7440 Posts7485
By XE Market Analysis September 3, 2020 4:18 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5364
    XE Market Analysis: Europe - Sep 03, 2020

    The dollar is up for a third straight day as measured by the narrow trade-weighted DXY index, which posted a six-day high at 93.03, further extending the rebound from Tuesday's 28-month low at 91.75. EUR-USD concurrently posted a one-week low at 1.1795. A profit taking impulse on dollar short positions was initially seen following the breach above 1.2000 earlier in the week, which came as market attention on the ECB's framework review rose following the unexpected negative August CPI figure out of the Eurozone (of -0.2% y/y). Like the Fed, the European central bank is considering shifting to an average inflation targetting regime. In the mix has been remarks by ECB Chief Economist Lane, on Tuesday evening, that while the ECB doesn't explicitly target the exchange rate, the EUR-USD rate matters, and that "it will be important to recognise that the euro-dollar rate is also endogenous to monetary policy." Although this states the obvious, following a 10%-plus rally in EUR-USD, Lane's remarks sounded a little like verbal intervention, similar to the RBA is apt to do about the Aussie dollar on occasion (the RBA already pursues average inflation targetting). Next week's ECB Governing Board policy meeting will be a big focus for markets. Other factors that have contributed to de-fizzing the dollar downtrend include the sharp drop in the rate of new coronavirus cases in the U.S., which is seeing the 'Europe-faring-better-than-America' narrative fade while increasing prospects for further de-restrictions. Wall Street's recording-breaking streak is also continuing, although Treasury yields have declined amid a bull flattening play. The approaching U.S. election is starting feature more strongly in market narratives, where a Democratic win scenario (President, House and Senate) is widely seen as dollar negative given the implied shift in regulatory and tax policies. Among other currency pairings, dollar firmness drove Cable and AUD-USD to respective six-day lows t 1.3277 and 0.7297, and lifted USD-CAD and USD-JPY to respective three-day highs at 1.3099 and 106.35. In data today, China's August Caixin composite PMI beat expectations in rising to 55.1.

    [EUR, USD]
    EUR-USD posted a one-week low at 1.1795. A profit taking impulse on dollar short positions was initially seen following the breach above 1.2000 earlier in the week, which came as market attention on the ECB's framework review rose following the unexpected negative August CPI figure out of the Eurozone (of -0.2% y/y). Like the Fed, the European central bank is considering shifting to an average inflation targetting regime. In the mix has been remarks by ECB Chief Economist Lane, on Tuesday evening, that while the ECB doesn't explicitly target the exchange rate, the EUR-USD rate matters, and that "it will be important to recognise that the euro-dollar rate is also endogenous to monetary policy." Although this states the obvious, following a 10%-plus rally in EUR-USD, Lane's remarks sounded a little like verbal intervention, similar to the RBA is apt to do about the Aussie dollar on occasion (the RBA already pursues average inflation targetting). Next week's ECB Governing Board policy meeting will be a big focus for markets. Other factors that have contributed to de-fizzing the dollar downtrend include the sharp drop in the rate of new coronavirus cases in the U.S., which is seeing the 'Europe-faring-better-than-America' narrative fade while increasing prospects for further de-restrictions. Wall Street's recording-breaking streak is also continuing, although Treasury yields have declined amid a bull flattening play. The approaching U.S. election is starting feature more strongly in market narratives, where a Democratic win scenario (President, House and Senate) is widely seen as dollar negative given the implied shift in regulatory and tax policies.

    [USD, JPY]
    USD-JPY whittled out a three-day high at 106.35, despite concurrent yen gains versus most of the other developed-world currencies. USD-JPY's gains is a tentative break from a narrow orbit of the 106.00 level, a level which roughly marks the midway point of the range that's been seen over the last month. A firmer dollar environment has lifted the pair. Most yen crosses have been trending higher since May, with the Japanese currency tracking inversely with global stock market direction. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. 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 a profile of being a low-beta haven currency. With risk appetite among market participants high, fuelled by massive monetary and fiscal stimulus efforts worldwide, the yen has been trending lower (ex USD-JPY). This looks likely to remain the case for now.

    [GBP, USD]
    Cable posted a six-day low at 1.3277. At the same time, the pound logged a near three-month high against the euro, with EUR-GBP dropping to 0.8866, the lowest level the cross has seen since June 9th. The common currency's underperformance is being seen as markets focus on a possible framework change at the ECB aimed at increasing inflation, which comes in light of the unexpected negative reading in August Eurozone CPI data (of -0.2% y/y). The ECB next meets on policy next week. Some narratives are also citing strong July consumer lending data out of the UK, released earlier in the week, as having helped EUR-GBP lower. Job losses are continuing in the UK, however, with vulnerable areas of the labour market being impacted by the partial unwinding of the government's wage support scheme last month. The scheme is due to fully expire next month. The rebound in consumer lending, after four months of contraction, is a particular positive in the circumstances, as it suggests demand conditions are improving, which may help the private sector weather the withdrawal of the furlough scheme. The pound faces other downside risks, including possible tax hikes and the risk of a bare-bones deal or no-deal outcome in the Brexit endgame. For now, the UK currency looks set for more mixed trading.

    [USD, CHF]
    EUR-CHF once again failed to sustain gains above the 1.0800 level, returning to familiar levels in the mid 1.0700s. This is a pattern that has been repeating for about six weeks now. This week the cross spiked sharply, on Tuesday, to a three-month peak at 1.1882. The rally was concomitant with EUR-USD soaring into 28-month high territory above 1.2000. Robust manufacturing data from most key global economies, and global stock market gains may have also helped weaken the low beta, safe haven Swiss franc. The influence of the SNB's intervening hand may have been at play during the recent upside bursts. Total Swiss sight deposits of francs have risen by over 130 bln since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. EUR-CHF still remains below the seven-month peak that was seen in early June at 1.0921. One downside risk for EUR-CHF is the Brexit endgame, which is fast approaching. The latest reports suggest the EU and UK are in a total impasse just one month before a deal has to be struck before the UK leaves the EU's single market at year-end. The risk is that the two sides will reach only a bare bones deal, or even no deal at all. The prospect for this would be de-stabilising for both the pound and euro, and would likely underpin the franc.

    [USD, CAD]
    USD-CAD has pegged to a three-day high at 1.3099, floated by a broadly firmer U.S. currency and an ebb in crude prices, which is a negative for oil-correlating currencies such as the Canadian dollar. Front-month WTI futures have printed a four-week low at $41.09 low, extending the correction from last week's four-week low at $43.78. Weekly data showing a drop in U.S. gasoline demand, and upcoming closures of refining facilities in the U.S., which will temporarily weaken demand for crude, are being cited in oil market narratives. Canada's calendar brings the August employment report tomorrow. We expect 350.0k rise in jobs after the 418.5k gain in July, the record 952.9k surge in June, and the 289.6k increase in May. The recent employment gains, and the expected gain in August, will roughly recoup two thirds of the sizeable declines during the pandemic lockdown in March and April.

    Paste link in email or IM