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By XE Market Analysis August 5, 2020 7:07 am
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    XE Market Analysis: North America - Aug 05, 2020

    The dollar is down for a second day, while gold prices have spurted to a fresh nominal high at $2,048.00 (still a long way from a record peak in inflation-adjusted terms). Washington's policy stalemate on another pandemic relief bill has remained a major source of concern to investors. Though stock markets found modest support on some signs of progress on a fiscal deal, with participants saying they are getting closer while vowing to work around the clock, both sides remained far apart. Markets are sensitive to this given that high frequency data is painting a picture of flagging growth momentum in the U.S. economy. The narrow trade-weighted USD index (DXY) ebbed under Tuesday's low at 93.15 on route to a 92.86 nadir. The new low marks over a three-quarters retrace of the dollar's rebound that was seen on Friday and Monday, from the 27-month low at 92.55 to the bounce peak at 93.99. EUR-USD concurrently lifted to a peak at 1.1861, its loftiest level sine Friday. Cable has seen a similar price action, as has AUD-USD, which printed a high at 0.7221, despite S&P Ratings putting Australia's state of Victoria on negative ratings watch as a consequence of the lockdown measures being taken there. USD-JPY ebbed to a five-day low at 105.51 on the back of the dollar's weakness, with the yen losing ground to the Australian dollar today and holding steady versus the euro and other currencies. USD-CAD fell to its lowest level since February, at 1.3242, aided lower by both a generally soft U.S. dollar and with front-month WTI crude futures scaling to a fresh five-month peak at $42.09.

    [EUR, USD]
    EUR-USD lifted to a peak at 1.1861, its loftiest level sine Friday and reflecting a renewed phase of dollar softness. Washington's policy stalemate on another pandemic relief bill has remained a major source of concern to investors, and most Treasury yields have pushed further into historic low territory. Though Wall Street found modest support on some signs of progress on a fiscal deal -- participants said they are getting closer while vowing to work around the clock -- both sides remained far apart. Markets are sensitive to this given that high frequency data is painting a picture of flagging growth momentum in the U.S. economy. The narrow trade-weighted USD index (DXY) ebbed under Tuesday's low at 93.15 on route to a 92.86 nadir. The new low marks over a three-quarters retrace of the rebound that was seen on Friday and Monday, from the 27-month low at 92.55 to the bounce peak at 93.99. Recent gains in the euro, which for a period came amid a risk-off backdrop in global markets, if 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. In Europe, localized bumps in new coronavirus cases (which many media outlets like to describe as "surges") have led to some new travel and other lockdown restrictions, though the reopening process remains largely intact. New cases in some of the recently afflicted states in the U.S., including Texas and Florida, have started to drop quite sharply. We remain EUR-USD bullish, anticipating a visit to the 1.2000 level. Dollar bears should take note that President Trump reported said there is a "big number" coming with Friday's jobs report.

    [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 been floated once again by a broad dollar weakness. The pair scaled to a 1.3124 peak, extending the rebound from yesterday's six-day low at 1.2981 and drawing back in on last Friday's five-month peak at 1.3171. The pound has fared less well against the likes of the euro and Australian dollar, among other currencies. The pound outperformed last week amid 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. The final round of discussions is set for the week commencing October 2nd. Narratives last week had also been noting a pick-up in the pace of economic recovery in the UK, as confirmed by July PMI data, though the new lockdown 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 was reduced this week). Recent dollar underperformance has been somewhat flattering the pound, which still registers as the weakest of the main currencies on the year-to-date, and by some distance in trade-weighted terms. The BoE's Monetary Policy Committee is reviewing policy (announcing tomorrow), where a no change is widely anticipated, alongside what will no doubt be a reassuringly strong commitment to maintain ultra-accommodative policy.

    [USD, CHF]
    The Swiss franc has steadied below highs after showing 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 its lowest level since February, at 1.3266, aided lower by both a generally soft U.S. dollar and with front-month WTI crude futures remaining buoyant after scaling to a 13-day high yesterday at $42.09. 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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