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By XE Market Analysis August 21, 2020 7:03 am
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    XE Market Analysis: North America - Aug 21, 2020

    The dollar found a footing as EUR-USD tumbled following sub-forecast preliminary August PMI data out of the eurozone. EUR-USD printed a one-week low at 1.1784, declining from a two-day peak at 1.1883. Contrasting above-forecast PMI data out of the UK sparked specific EUR-GBP selling, too, which added weight on EUR-USD's down phase. The slew of localized lockdown measures and travel restrictions have taken a toll on economic activity in the Eurozone (even though the rise in new SARS Cov-2 coronavirus cases have clearly not been accompanied with negative public health events -- as defined by clinical illnesses and associated ICU admissions and mortalities). Cable nudged back under 1.3200 after running to a two-day high earlier, at 1.3255. This saw Wednesday's eight-month peak at 1.3269 slip back over the near horizon. The pound fared better against the euro, with EUR-GBP dropping to a six-week low at 0.8943, extending a sharp retreat from yesterday's 0.9070 high. USD-JPY pegged a two-day low at 105.44 amid broad dollar weakening before lifting to around 105.80 after the greenback found a footing. USD-CAD fell to a two-day low at 1.3157 before recouping to around 1.3200. Wednesday's seven-month low at 1.3134 has been left unchallenged.

    [EUR, USD]
    EUR-USD has taken a tumble and printed a one-week low at 1.1801, surpassing yesterday's trough by 1 pip, according to our data. The pair had earlier edged to a two-day peak at 1.1883. The about-turn was caused by sub-forecast preliminary August PMI data out of the eurozone, which weighed on the euro. Contrasting above-forecast PMI data out of the UK sparked specific EUR-GBP selling, too, which added weight on EUR-USD's down phase. The slew of localized lockdown measures and travel restrictions have taken a toll on economic activity in the Eurozone, even though the rise in new SARS Cov-2 coronavirus cases have clearly not been accompanied with negative public health events -- as defined by clinical illnesses (the development of the Covid-19 disease) and associated ICU admissions and mortalities. The PCR (polymerase chain reaction) testing has well known flaws, such as not being able to distinguish between a 'live' virus or viral fragments left over from a previous infection, and generating false positives, while the much increased level of testing may simply be painting a picture of a virus outbreak in its final throws, fitting the still-outside-of-mainstream-thinking hypothesis that the peak spread was in March (in Europe) and population immunity has been increasingly built up. No matter, what counts is how governments and people react. Clearly the 'feardemic' is retaining a fairly tight grip, with the consequence today of knocking the euro lower. The more recently afflicted U.S. sun states, such as Texas and Florida, are continuing to see sharp declines in new cases, ICU admissions and mortalities, fitting a classic Gompertz curve of contagious respiratory illness.

    [USD, JPY]
    USD-JPY printed a two-day low at 105.44 amid broad dollar weakening before lifting to around 105.80 after the greenback found a footing. The yen 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 a reputation as a reliable haven currency. With global asset markets having been buoyant of late, the yen has been on a underperforming path versus most currencies.

    [GBP, USD]
    Cable came off the boil amid a perk-up in dollar performance, driven by a drop in EUR-USD, which nudged the pair back under 1.3200 after running to a two-day high earlier, at 1.3255. This saw Wednesday's eight-month peak at 1.3269 slip back over the near horizon. The pound fared better against the euro, with EUR-GBP dropping to a six-week low at 0.8943, extending a sharp retreat from yesterday's 0.9070 high. Above-forecast July retail sales and preliminary August PMI data have helped, while the risk-on backdrop in global markets is generally being seen as a positive for the pound, which had underperformed notably during the worse of the market carnage back in March (with the UK being exposed due to its large current account deficit and open economy). On the EU-UK trade negotiation front, a Brussels source cited by Reuters said that no progress has been made during this week's round of discussions. This fits with what a well-connected UK journalist for The Sun tabloid reported this week, that there was "growing whispers" that the EU's demands for the so-called "level-playing-field rules" -- which will keep the UK bound to EU rules in return for a generous trade deal -- could be too much to overcome for the UK government. It is also understood that Brussels is hoping that the UK will buckle in its demands on this front under the pressure of deadline, which will be October's EU leaders' summit, and which at the least will keep the uncertainty going until then. Given the risks of a no deal, or only a narrow deal, we expect the pound's upside to be limited from here. We also anticipate the UK's economic recovery from full lockdown to plateau in the weeks and months ahead. There are a number of localized lockdowns across the UK and new travel restrictions with foreign countries, while the government's furlough scheme will end in late October, which is likely to cause a sizeable upward jolt to the unemployment rate, with the aviation, retail and hospitality sectors to be hard hit.

    [USD, CHF]
    EUR-CHF has reversed the gains seen on Wednesday in falling back to the mid 1.0700s, down from the two-month high at 1.0853. The high had coincided with a strong risk-on vibe in global markets as Apple reached a $2 tln market capitalization and the S&P 500 and NASDAQ indices scaled to record highs. The franc, an historic low-beta safe-haven currency, periodically correlatives inversely with global stock market direction, along with sentiment about the EU (Switzerland's biggest trading partner). The influence of the SNB's intervening hand may have been at play this week, too. Total Swiss sight deposits of francs have risen by 130 bln since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. 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 should help the SNB combat what it sees as a chronically overvalued franc. EUR-CHF still remains below the seven-month peak that was seen in early June at 1.0921.

    [USD, CAD]
    USD-CAD fell to a two-day low at 1.3157, drawing back in on the seven-month low seen on Wednesday at 1.3134. A broader retreat in the U.S. dollar and a near $1.50 rebound in oil prices yesterday have combined to weigh on the pairing. Oil prices remain in a consolidation near recent five-month highs. The OPEC+ group this week affirmed that there was near full compliance on crude supply quotas among members, helping maintain a broad underpinning of crude prices, along with an overall risk-on theme in global markets. USD-CAD has been trending lower, albeit with waning momentum, since mid March. The global economic recovery from lockdowns, which were at their zenith in April, has been instrumental in driving this downtrend, while the U.S. currency waned as a safe haven unit before negative real U.S. yields subsequently become a dominant factor in driving the greenback's downtrend. Upside risks for USD-CAD include the OPEC+ group's course to easing output quotas, which could weigh on oil prices depending how it matches with the evolution in demand, alongside the coronavirus pandemic and geopolitical tensions, should they derail the recovery in global asset markets.

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