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By XE Market Analysis August 13, 2020 7:22 am
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    XE Market Analysis: North America - Aug 13, 2020

    The dollar is down for a second day, with the narrow trade-weighted USD index printing a six-day low at 93.03 to fully unwind the gains seen in the wake of last Friday's U.S. July jobs report. Market narratives have been attributing the dollar's weakening bias to the perception that the Fed has strategically dropped its concern about inflation risk, which has driven real U.S. yields into negative territory. Washington's tensions with Beijing also get a mention, although this evidently hasn't been much of a concern for Wall Street, with the S&P 500 finishing yesterday just a whisker off a closing record. Most onlookers anticipating this weekend's meetings to review progress on the Phase 1 trade deal will go well, though with China lagging behind in its purchases of U.S. farm and energy goods, there is potential for a bust up. Among the main dollar pairings, EUR-USD climbed to a six-day high at 1.1842, putting the 27-month high seen last Thursday at 1.1917 back in the scopes. Cable edged out a two-day high at 1.3100. USD-JPY extended a moderate correction from yesterday's three-week high at 107.03, posting a low at 106.57. The yen was more mixed against other currencies, with EUR-JPY pegging a fresh 16-month high, while AUD-JPY traded softer after the cross peaked at a three-week high yesterday. AUD-USD edged out a two-day peak at 0.7188. Australian July employment data showed a forecast-smashing 114.7k rise in the headline, while the June figure was revised higher, though lockdowns across the country and now blighting the immediate outlook. USD-CAD printed a new six-month low at 1.3219.

    [EUR, USD]
    EUR-USD etched out a fresh six-day high at 1.1842, inching slightly nearer to the 27-month high seen last Thursday at 1.1917. EUR-JPY concurrently ascended further into new 16-month high terrain, and the euro also rose strongly against the Aussie and Kiwi dollars, which are in the underperforming lane of currencies today. EUR-AUD pegged a nine-day high at 1.6529. Europe remains largely reopened despite localized restrictions corresponding with localized bumps in new coronavirus cases -- despite mounting evidence that new cases are not corresponding with new hospitalizations and mortalities, which very similar to what happened with the swine flu pandemic of 2009. The euro has continued to benefit from the advent of the 750 bln euro recovery fund. The narrow trade-weighted USD index, meanwhile, printed a six-day low at 93.08, which marks a near full unwind of the gains seen in the wake of last Friday's U.S. July jobs report. Market narratives have been attributing the dollar's weakening bias to the perception that the Fed has strategically dropped its concern about inflation risk, which has driven real U.S. yields into negative territory. Washington's tensions with Beijing also gets a mention, although this hasn't been much of a concern for Wall Street, with most onlookers anticipating this weekend's meetings to review progress on the Phase 1 trade deal will go well, even though China has been lagging behind in its purchases of U.S. farm and energy goods. These factors appear to be outweighing the improvement in the U.S. economy and downward trend in new coronavirus cases.

    [USD, JPY]
    USD-JPY has today extended a moderate correction from yesterday's three-week high at 107.03 in posting a low 106.57. Broader dollar weakness drove the ebb, while EUR-JPY has remained buoyant, pegging a fresh 16-month high at 126.47. AUD-JPY, meanwhile, has traded softer after the cross peaked at a three-week high yesterday. Recent weakness in the yen has reflected a risk-on vibe in most global stock markets. The Nikkei 225 hit a six-month high, which followed a strong close on Wall Street yesterday, with the S&P 500 finishing just a whisker below a record closing peak. 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, 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]
    The pound has been trading mixed, edging out a two-day high at 1.3090 against the dollar, while also gaining on the yen and Aussie dollar, but holding steady-to-softer versus the euro and some other currencies. Yesterday's preliminary UK Q2 GDP data showed a gargantuan 20.4% q/q contraction to confirm the technical definition of recession following Q1's 2.2% shrink. The data wasn't a surprise given the lockdown that was in place to varying degrees throughout the quarter. June GDP rose by 8.7% m/m, however, with June production data showing a robust rebound and beating expectations in the main headline readings, while high frequency data and a myriad of anecdotal evidence point to a strong rebound in the current quarter. The government's furlough scheme has greatly limited the impact on the employment market. We have been talking down the pound, to a degree, having seen limited scope for the currency to sustain its recent patch of outperformance. The BoE last week delivered a warily-upbeat outlook, though with localized lockdowns and most media doing their utmost to maintain maximum fear of a second wave of coronavirus infections, we take a circumspect view of the outlook over the coming months, anticipating a plateauing in economic rebound momentum. Manchester, Preston, Bradford and Aberdeen are back in lockdown and there are a number of new travel restrictions with other countries. The furlough scheme will end in late October, which is likely to trigger a wave of job losses, particularly in the airline, retail and hospitality sectors.

    [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 eked out a new six-month low at 1.3219. A weakening U.S. dollar, coupled with perky oil prices have been weighing on the pair, which we anticipate will retain a down-trending bias. Front-month WTI crude futures have carved out a fresh one-week high at $42.85. Bigger picture, USD-CAD pair has been trending lower, albeit with waning momentum, since mid March, after there had been a burst of demand of U.S. dollars when pandemic panic gripped the world. The global economic recovery from lockdowns, which were at their zenith in April, has been instrumental in USD-CAD's downtrend, with the Canadian currency rising concomitantly with oil prices while the U.S. currency has waned as a safe haven unit, and with negative real U.S. yields (on the view that the Fed may become strategically more tolerant of inflation risk) also eroding the greenback's performance. The Canadian dollar will continue to remain sensitive to fluctuations in 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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