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By XE Market Analysis August 4, 2020 7:06 am
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    XE Market Analysis: North America - Aug 04, 2020

    The dollar has ebbed, particularly against the euro and Australian dollar. EUR-USD lifted above Monday's 1.1797 high in posting a peak at 1.1806, while AUD-USD came within a couple of pips of its Monday high at 0.7155. With USD-JPY holding a narrow range near 106.00, both EUR-JPY and AUD-JPY lifted, though both remained off their respective Monday peaks. The price action among the main forex pairings and cross rates belied a deteriorating risk appetite across asset markets, which saw European stock markets and U.S. equity futures turn lower during the European morning, more than giving back intraday gains. Asian stock markets closed higher, and the MSCI world equity index posted a five-month high. Disappointing earnings from the world's biggest spirits manufacturer Diago and German pharmaceutical company Bayer weighed on cyclical stocks across European bourses. Market narratives are also expressing increasing angst about the stalemate on Capitol Hill over the next pandemic relief fiscal package, along with U.S.-China tensions, which look likely to worsen into November's presidential election, and about Hurricane Isaias, which is bearing down on the Atlantic coast of the U.S. Against this backdrop, the USD index (DXY) drifted to a four-day low at 93.21, illustrating the dollar's recent fall from grace in terms of being a safe haven. On a more positive note, Germany's Ifo institute stated that there are signs of recovery in the auto manufacturing industry, while the daily tally of new coronavirus infections are now dropping sharply in Texas and Florida, and other recently afflicted states. The RBA left its cash rate unchanged following its August policy review today, and announced a resumption in bond buying from tomorrow "to ensure the yield on 3-year bonds remains consistent with the target." USD-CAD ebbed to a five-day low at 1.3358. Front-month WTI crude prices softened after yesterday hitting a five-day high at $41.22. Gold prices settled about $15-$20 off of yesterday's nominal record high at $1,997.00.

    [EUR, USD]
    EUR-USD has posted a fresh high at 1.1803, which extends the rebound from yesterday's eight-day low at 1.1696. The euro has concurrently lifted by a similar magnitude against the pound and yen, while holding steady versus the Australian dollar and Swiss franc. The gains in the euro come with European stocks and U.S. index futures having turned lower, which is nothing else demonstrates a new-found confidence in the common currency. The agreement on the EU's 750 bln 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. The stalemate on Capitol Hill over the next pandemic fiscal support bill and anxieties about Hurricane Isaias also seem to be weighing on the dollar. New Jersey governor has declared a state of emergency as the U.S. Atlantic coastal states brace for the storm. In Europe, localized bumps (which many media outlets like to describe as "surges") in new coronavirus cases have led to some new travel and other lockdown restrictions, though the reopening process remains largely intact. We have been anticipating EUR-USD to make a visit to the 1.2000 level.

    [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 made a rebound peak at 1.3108 after setting a five-day low at 1.3004 yesterday. The UK currency has been directionally more neutral against the euro and most other currencies. The pound 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, though final July manufacturing PMI was unexpectedly revised lower while localized lockdowns, including in the economically-important Manchester area, and the continued 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 BoE reviews policy this week (announcing on Thursday), where a no change is 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 again showed a noticeable drop on Monday, as it did the Monday prior. The influence of the SNB's intervening hand seems to have been at 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. The crosses yesterday matched the two-month high that was first pegged last week 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, and which will help the SNB combat what it sees as a chronically overvalued franc.

    [USD, CAD]
    USD-CAD has ebbed to a five-day low at 1.3358. The low has been concomitant with front-month WTI crude prices remaining buoyant after yesterday hitting a five-day high at $41.22. 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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