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By XE Market Analysis August 7, 2020 7:12 am
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    XE Market Analysis: North America - Aug 07, 2020

    The dollar rallied on position trimming into the U.S. payrolls report. The narrow trade-weighted USD index (DXY) posted a two-day high at 93.22, extending the rebound from the 27-month low seen yesterday at 92.53. EUR-USD has printed a two-day low at 1.1810 low and over a big figure down from yesterday's 27-month peak. Cable posted a two day low at 1.3085, drawing back from the 1.3187 five-month peak seen Thursday following the warily-upbeat BoE outlook. USD-JPY continued to ply a narrow range in the mid 115.00s. Both the Aussie and Kiwi dollars correctly moderately as the U.S. currency firmed. AUD-USD, after first edging out a high at 0.7243, which matches Wednesday's 18-month peak, ebbed to a low at 0.7196. USD-CAD lifted to a three-day high at 1.3372. Front-month WTI futures were soft for a second day, maintaining sub-$42.0 levels after posting a five-month high earlier in the week at $42.52. Gold prices corrected to around $2,050.0 after printing a fresh nominal record high at $2,077.85. The ascent of gold has been a reflection of investor concerns over the risk of there being an eventual pop in inflation as a consequence of massive global fiscal stimulus efforts and massive global monetary uber-accommodation, although there has been scant sign of this happening thus far, with disinflation remaining in force and with much of the U.S. yield curve and other sovereign benchmark yields either at or near record lows. In the mix is speculation that the Fed, and possibly other major central banks, may be amid a strategic shift to allow higher inflation. U.S.-China tensions continued to simmer, with President Trump, by executive order, banning Tiktok and WebChat from operating in 45 days if they are not sold by Chinese parent companies.

    [EUR, USD]
    EUR-USD has printed a two-day low at 1.1810 low and over a big figure down from yesterday's 27-month peak. The drift lower has been concomitant with the narrow trade-weighted USD index (DXY) posting a two-day high at 93.22, extending the rebound from the 27-month low seen yesterday at 92.53. Position trimming has been at play into the release of the U.S. July employment report, which is later today. Markets overlooked a stronger than expected rebound in Germany's June industrial production. The U.S. jobs report has huge potential to catalyse a big reaction in markets, either for more record lows in Treasury yields and more dollar weakness, or a dramatic rebound in yields, along with a rally on Wall Street and a strong rebound in the dollar. We are forecasting non-farm payrolls to rise 2.600 mln versus the previous 4.767 mln increase. Hourly earnings are seen falling 0.4% from the 1.2% decline in June, while the average workweek is seen steady at 34.5. The unemployment rate should fall to 10.2% from 11.1%.

    [USD, JPY]
    USD-JPY has so far today continued to ply a narrow range (less than 20 pips, as of the late London morning session) around the 115.50 mark. 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 posted a fresh two-day low at 1.3086, drawing back from the 1.3187 five-month peak seen Thursday following the BoE's deliverance of a warily-upbeat outlook. The pound has also corrected from the post-BoE highs see against the euro and other currencies. Following a phase of outperformance, we are taking a circumspect view of the pound's upside potential. Both Manchester and Aberdeen are back in lockdown. The city of Leicester, however, has reopened after being locked down for most of the past month. There there has been no follow-through from higher new cases in Leicester to an event-impact of corresponding higher hospital admittances and mortality (note that the test for the coronavirus cannot distinguish between whether the virus is 'live' or is debris from a prior infection of the virus). Regarding the coronavirus, there are two schools of thought: one is that only a tiny fraction of the population has built up an immunity to SARS Cov-2 and, ergo, there is a significant risk of a frightening second wave; the other (which, importantly, recognises that the coronavirus has been in Europe since last October, as sewage samples have proven) is that the virus has already spread through a large part of the population and a communal immunity has been built up (the unfortunate consequence being that vulnerable groups have been badly effected), with the mortality outcome of about 0.05% consistent with a classic Gompertz curve of respiratory illness cycles, albeit a relatively bad one. The Leicester experience adds weigh to the latter school of thought. Either way, the new lockdowns, and ongoing "feardemic" as winter approaches, have potential to erode economic recovery metrics. Brexit also remains unresolved, although off the agenda for now during the summer break. Talks are scheduled to resume on the week of August 17th. The final round of discussions is set for the week commencing October 2nd. Recent sourced articles in the UK press have suggested that there is greater scope for a deal being struck than the official line has suggested, and there is certainly incentive on both sides for a deal to be made, though it would still remain to be seen how extensive a new trade deal would be.

    [USD, CHF]
    The Swiss franc has steadied below lows 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 rallied to a three-day high at 1.3372, rebounding out of yesterday's six-month low at 1.3231. This price action has been concomitant with a rebound in the U.S. dollar along with front-month WTI crude futures ebbing under $42.0 after capping out yesterday at a five-month peak at $43.52. 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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