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By XE Market Analysis August 3, 2020 7:34 am
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    XE Market Analysis: North America - Aug 03, 2020

    The dollar is up for a second consecutive trading day, with the narrow trade-weighted USD index posting its best level since last Tuesday, at 93.83, extending a rebound from the 25-month low that was seen on Friday at 92.55. EUR-USD concurrently ebbed below Friday's low on route to a low at 1.1717, extending the correction from Friday's 26-month peak at 1.1910. Cable similarly put in some distance from Friday's 1.3171 trend peak in pulling back to a low at 1.3013. USD-JPY printed a 10-day peak at 106.43, which is over 2 big figures up on Friday's five-month low at 104.18, before ebbing back under 106.00. AUD-USD descended to 0.7097, which is the pair's lowest level since last Tuesday and extends a correction from the 17-month peak that was seen on Friday at 0.7229. USD-CAD has traded firmer and tested Friday's high at 1.3441. Oil prices are trading relatively steadily, above Friday's correction lows. Gold prices hit a fresh nominal record peak soon after the open in Asia-Pacific markets today, at $1,994.20, before capping out and settling to near net unchanged levels under $1,980.00. Stock markets in Asia were mixed, while equities gained in Europe, along with U.S. index futures. Japan's Nikkeo 225 outperformed, closing with a 2.2% gain, buoyed by the bounce in USD-JPY, while the MSCI Asia-Pacific index (ex Japan) ebbed by 0.5%. Europe's STOXX 50 was up 1.6% in early PM trading. Above-forecast final July manufacturing PMI readings came in from China, Japan and the Eurozone, while the UK's version was unexpectedly revised lower. Congress in the U.S. is struggling to finalize a new fiscal relief package, despite pandemic-era unemployment benefits having expired on Friday. The impact of lockdown measures in response to the pandemic/"feardemic", remains a concern, too, although the media and many governments continue studiously overlook the evidence of herd immunity developing in places where it has run its course, such as most of Europe, along with the fact that the SARS Cov-2 coronavirus, while highly contagious and of genuine concern for the vulnerable, is not anywhere near a virulent for the broader population as feared back in March.

    [EUR, USD]
    EUR-USD has ebbed below Friday's low on route to a low at 1.1736, extending the correction from Friday's 26-month peak at 1.1910. The dollar has once again been driving the pair, with the U.S. currency staging a rebound following a period of pronounced underperformance. The dollar's gains today come despite the struggles of Congress in the U.S. to finalize a new fiscal relief package, even with pandemic-era unemployment benefits having expired on Friday. The consequence is that more than 30 million U.S. citizens are seeing their income drop by 50%-75%. Following the historic 32.9% y/y contraction in Q2 GDP, and with many states exercising lockdown measures, the pressure is on. The impact of lockdown measures in response to the coronavirus remains a concern, too (although the media and many governments continue studiously overlook the evidence of herd immunity developing in places where it has run its course, such as most of Europe, along with the fact that the SARS Cov-2 coronavirus, while highly contagious and of genuine concern for the vulnerable, is not anywhere near a virulent for the broader population as feared back in March). In Europe, localized bumps in new cases have led to some new travel and other lockdown restrictions, though the reopening process remains largely intact. While the epidemic in Europe has passed, the "feardemic" of a second wave remains in full force. EUR-USD is in correction mode at present, but still looks to be amid an overall up trend.

    [USD, JPY]
    USD-JPY fell back below 106.00 during the London morning after printing a 10-day peak at 106.43 during the Tokyo session, which marked over a 2 big figure rise from Friday's five-month low at 104.18. Japan's Nikkeo 225 outperformed in Asia today, closing with a 2.2% gain, buoyed by the bounce in USD-JPY, while the MSCI Asia-Pacific index (ex Japan) ebbed by 0.5%. 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 has put in some distance from Friday's 1.3171 trend peak in pulling back to a low at 1.3037. A rebound in the U.S. currency has been at play. The UK currency outperformed last week, 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 had been somewhat flattering the pound. Helping the pound last week were 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. There is now summer a hiatus in negotiations, which will resume on the week of August 17th. Narratives last week had also been noting a 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. However, localized lockdowns, including in the economically-important Manchester area, and the continued full-throttled media-driven "feardemic," is clouding the outlook for the UK economy at a time when government pandemic business support measures have started to unwind (compensation for furloughed workers has been reduced). The UK calendar this week is highlighted by the BoE's August Monetary Policy Committee meeting (announcing on Thursday), where a no change in interest rates and asset purchase settings are widely anticipated, alongside what will no doubt be a reassuringly strong commitment to maintain ultra-accommodative policy. The central bank will also release its quarterly policy review with revised growth and inflation forecasts.

    [USD, CHF]
    The Swiss franc is again showing a noticeable drop, as it did last Monday, with the currency showing a loss of over 0.5% against both the dollar and euro. The influence of the SNB's intervening hand seems to be a play. 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. Last Monday, EUR-CHF made a rare appearance on the 'biggest daily mover' list out of the main dollar pairings and associated cross rates, when is showed a 1% gain on one day. A two-month high was pegged at 1.0841 before the cross took a rotation lower. The high so far today is at 1.0814. 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, and which will help the SNB combat what it sees as a chronically overvalued franc.

    [USD, CAD]
    USD-CAD has traded firmer and tested Friday's high at 1.3441. Oil prices are trading relatively steadily, above last week's correction lows. Front-month WTI crude futures hit a three-week low last Thursday at $38.72, and while since recouping to levels near $40.0, remain down by over 4% 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 the recovery in global asset markets.

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