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By XE Market Analysis September 8, 2020 4:24 am
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    XE Market Analysis: Europe - Sep 08, 2020

    The dollar traded firmer against most peer currencies amid a backdrop of rebounding global stock markets. The narrow trade-weighted USD index printed a four-day high at 93.20, while EUR-USD ebbed to a four-day low at 1.1795. Cable, which is down for a fifth consecutive trading day, posted a 13-day low at 1.3128, while EUR-GBP concurrently lifted to a 13-day high, at 0.8996. The pound also dropped against the yen and other currencies. The news is that UK Prime Minister Boris Johnson will later today give a speech later where he will defend his government's decision introduce legislation that will unilaterally unpick parts of the EU Withdrawal Agreement, which is specifically designed to enhance the UK's state aid autonomy rather than constrain it, putting the UK on a crash course with Brussels (and its regime for limited state aid). This risk of the UK exiting the EU without a trade deal are now much greater. Elsewhere, USD-JPY has remained in a narrow range in the lower-to-mid 106.00s. The 106.00 level roughly marks the midway point of the range that's seen seen over the last month. AUD-USD posted a five-day high at 0.7308, with the relatively high beta Aussie currency lifting concomitantly with rebounding global stock markets. The Canadian dollar fared less well, with crude prices down 2% today. USD-CAD floated to a four-day peak at 1.3120. There is some dissonance between the buoyancy in stock markets and news and data today. Tensions between Australia and China and the U.S. and China continued to ratchet up, while Japanese Q2 GDP showed a sharp drop and Australian business conditions data remained deeply in the red.

    [EUR, USD]
    EUR-USD has settled in the mid 1.1800s after recouping from the post-U.S. payrolls low at 1.1781. The overall better than expected U.S. August jobs report saw yields rise across the curve in a steepening shape. The dollar might have rallied more were it not for the Fed having recently codified the lower-for-longer rate protocol, and Fed Chair Powell assured, after the data on Friday, that the Fed won't prematurely withdraw support while noting that the recovery will "get harder from here." The focus shifts to the ECB meeting on Thursday after bearish members of the governing council recently voiced their concern about uptrend in EUR-USD . While we expect a strengthening of the "low for longer" message, hopes of a clear signal of additional easing or even further rate cuts are likely to be disappointed. ECB hawk, Wunsch, said on Friday that dovish expectations for Thursday's meeting risk overshooting. We expect EUR-USD trading to be two-sided into the ECB council meeting.

    [USD, JPY]
    USD-JPY has remained in a narrow range in the lower-to-mid 106.00s. The 106.00 level roughly marks the midway point of the range that's seen seen over the last month. Most yen crosses have settled after dropping quite sharply amid the Wall Street-led tumble in global stock markets last week, which elicited a degree of safe haven demand for the Japanese currency. In the bigger picture, 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, which is down for a fifth consecutive trading day, posted a 13-day low at 1.3128, while EUR-GBP concurrently lifted to a 13-day high, at 0.8996. The pound also dropped against the yen and other currencies. The news is that UK Prime Minister Boris Johnson will later today give a speech later where he will defend his government's decision introduce legislation that will unilaterally unpick parts of the EU Withdrawal Agreement, which is specifically designed to enhance the UK's state aid autonomy -- rather than constrain it, which puts the UK on a crash course with Brussels (and its regime for limited state aid). This risk of the UK exiting the EU without a trade deal are now much greater.

    [USD, CHF]
    EUR-CHF has nudged back above 1.0800, a level that the cross has repeatedly failed to sustain gains above over the last couple of months. 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 floated to a four-day peak at 1.3120, aided upwards by a generally firmer U.S. currency and a drop in oil prices. Front-month WTI futures were showing a 2% decline as of the early London session and coming within 11 cents of yesterday's two-month low at $38.57. The stalling out in the recovery pace of the global economy, large crude stockpiles, and uncertainty about Chinese demand (which has been importing crude in record quantities in recent months, but may now be ready to slow this process down) has weighed on oil. The end of the North American summer driving season has also been getting a mention in market narratives. This backdrop should maintain USD-CAD's steady-to-upward bias for now.

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