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By XE Market Analysis August 24, 2020 7:06 am
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    XE Market Analysis: North America - Aug 24, 2020

    The dollar's weakening bias resurfaced during the European morning session, pushing the USD index (DXY) to a low at 92.92, which marks over a 50% retrace of Friday's gain. EUR-USD concurrently lifted to a high at 1.1841, which is over 40 pips on last week's closing level. The pair still remains comfortably below last week's 27-month peak at 1.1967. USD-JPY has posted a sub-25-pip range so far today, holding in the mid-to-upper 105.00s. The pair has been trending lower since early June, from levels near 110.00, reflecting broad dollar weakness over this period, with the Japanese currency losing ground to other currencies, including the euro and Australian dollar, during this time. The yen's general weakness has been concomitant with risk appetite coursing through global markets, fuelled by massive fiscal and monetary efforts worldwide in response to the disruptions causes by the pandemic-induced lockdowns. USD-CAD has pegged a five-day low at 1.3150, drawing back in on the seven-month low seen on Wednesday at 1.3134. The Canadian dollar has been buoyed by perky oil prices, which jumped nearly 50 cents at the Asia-Pacific open as markets factor potential disruption in Gulf of Mexico crude production as two major hurricanes bear down. While the dollar weakening bias is sustaining, the trend's momentum has been waning. For instance, last week, while still producing a new trend high, was the first down week EUR-USD has seen out of the last nine weeks. The record-breaking streak on Wall Street and recovering U.S. economy have been rebalancing the apple cart. A big focus this Thursday will be on Fed Chairman Powell's Jackson Hole speech on the Policy Framework Review, with markets looking for information on an expected shift in the central bank's inflation targetting. Expectations that the Fed will pursue uber-aggressive monetary stimulus for longer than than prevailing protocols would allow -- i.e. effectively become more sanguine about inflation risk -- have been a driving factor in pushing real Treasury yields deep into negative territory, which has corresponded with dollar weakening.

    [EUR, USD]
    EUR-USD has lifted amid a phase of broad dollar selling, which took hold following the London interbank open earlier and has seen some acceleration. The high so far is 1.1839, which is over 40 pips on last week's closing level. The U.S. currency has also lost ground to the pound and Australian dollar, among others, and the USD index (DXY) has concurrently dipped to a low at 92.98, which marks about a 50% retrace of Friday's gain. The dollar weakening bias appears to remain in play, although the trend's momentum has been waning. For instance, last week, while still producing a new trend high, was the first down week EUR-USD has seen out of the last nine weeks. Wall Street equity indices hitting record highs has challenged the dollar's downtrend. Last Tuesday that the S&P 500 finally topped the February-19th high, fully recovering from the COVID-19 collapse to the March 23 low of 2237. The NASDAQ continued its stellar run, hitting a record level for the 36th time this year. Much stronger than expected new home sales and Markit PMI numbers were the latest indicators supporting optimism on the U.S. economic recovery, along with hopeful news on a vaccine for the coronavirus. A big focus this Thursday will be on Fed Chairman Powell's Jackson Hole speech on the Policy Framework Review, with markets looking for information on an expected shift in the central bank's inflation targetting. Expectations that the Fed will pursue uber-aggressive monetary stimulus for longer than prevailing protocols would allow -- i.e. effectively become more sanguine about inflation risk -- have been a driving factor in pushing real Treasury yields deep into negative territory, which has corresponded with dollar weakening. The inflation-adjusted 5-year T-note yield dropped from the March high at 0.63% to -1.25% currently (reaching a -1.32% low in early August). The dollar may have further to weaken, though the risk to this view is U.S. economic recovery.

    [USD, JPY]
    USD-JPY has posted a sub-25-pip range so far today, holding in the mid-to-upper 105.00s. The pair has been trending lower since early June, from levels near 110.00, reflecting broad dollar weakness over this period, with the Japanese currency losing ground to other currencies, including the euro and Australian dollar, during this time. The yen's general weakness has been concomitant with risk appetite coursing through global markets, fuelled by massive fiscal and monetary efforts worldwide in response to the disruptions causes by the pandemic-induced lockdowns. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. 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, although not the dollar. As for the dollar, markets have been running with a bearish view, partly hinged on real U.S. Treasury yields having dropped sharply into negative terrain (on the view that the Fed will shift to a strategically more tolerant stance on inflation, which has started to perk up in the U.S. as a consequence of stimulus measures). The political dithering over a new fiscal recovery program on Capitol Hill, and fact that substantial parts of the U.S. (the more southern states) has been affected by the pandemic at a later stage to some key peers, such as Europe, have also been parts of the weakening dollar hypothesis. The advent of the EU's 750 bln recovery fund (which has reduced the perceived odds for the union to breakup while offering international investors a new AAA fund) has been in the mix as a bullish EUR-USD factor, too.

    [GBP, USD]
    Cable has settled near the 1.3100 mark after dropping quite sharply from last Wednesday's eight-month high at 1.3269. Last week's trade talks between the EU and UK were a flop, which weighed on the pound on Friday. EU chief negotiator, to recap, said that he was "disappointed, concerned and surprised," while his UK counterpart, Frost, accused the EU of being "unnecessarily difficult." This chimes with what a well-connected UK journalist of The Sun tabloid reported earlier last 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. Fishing rights is another seemingly insurmountable sticking point. 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 will at the least keep uncertainty going until then. Given the risks of a no deal, or only a narrow deal, we are wary about the pound's outlook. Incoming data have included above-forecast July retail sales and August preliminary PMI figures, with the latter inflated by a government stimulus scheme to boost the restaurant and pub business, which will expire at the end of the month. We 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 an 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 last Wednesday in falling back to, and settling in, the mid 1.0700s, down from the two-month high that was pegged 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 last 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 five-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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