Home > XE Currency Blog > XE Market Analysis: North America - Aug 25, 2020

AD

XE Currency Blog

Topics7440 Posts7485
By XE Market Analysis August 25, 2020 7:07 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5364
    XE Market Analysis: North America - Aug 25, 2020

    The dollar and yen have softened against most currencies, while the euro has been topping the top-performing list. This dynamic has come amid risk-on positioning in global markets. Encouraging news on the U.S.-China Phase 1 trade deal, and on developments of COVID-19 treatments and vaccinations, have been tonic for investors. EUR-USD lifted to the mid 1.1800s, posting an intraday peak at 1.1843, which is 60 pips up on Monday's New York closing level. The euro has also rallied against the yen, which is the day's biggest loser, and most other currencies. While a bout of general dollar selling has helped to lift EUR-USD, there have concurrently been a couple of cues to buy euros, including August German Ifo business climate indicator, which beat forecasts in rising to a headline reading of 92.6, and remarks from German finance minister Scholz, who said there are signs that the German economy is developing above forecasts. USD-JPY, meanwhile, posted an eight-day high at 106.38, which is a gain of just over 40 pips on yesterday's closing level. The biggest mover out of the main currency pairings and crosses was EUR-JPY, which was showing over a 0.8% gain. The cross printed a six-day high at 125.97. GBP-JPY was not far behind, while AUD-JPY was showing a near 0.5% upward advance. Cable pegged an intraday high at 1.3126. USD-CAD posted a five-day peak at 1.3240 in pre-London trading, subsequently settling lower.

    [EUR, USD]
    EUR-USD has lifted to the mid 1.1800s, posting an intraday peak at 1.1843, which is 60 pips up on Monday's New York closing level. The euro has also rallied against the yen, which is the day's biggest loser, and most other currencies. While a bout of general dollar selling has helped to lift EUR-USD, there have concurrently been a couple of cues to buy euros, including August German Ifo business climate indicator, which beat forecasts in rising to a headline reading of 92.6, and remarks from German finance minister Scholz, who said there are signs that the German economy is developing above forecasts. Regarding EUR-USD, the pair's five-month rally out of sub-1.0650 levels of mid March has been losing momentum in recent weeks, although still producing new 27-month highs. Last week was the first down week the pair has seen out of the last nine weeks. We anticipate a sustained correction is increasingly likely. The U.S. is clearly through the worst of the pandemic, the economy is rebounding, Wall Street is on an record-breaking winning streak, and Treasury yields have perked up in recent sessions despite an expected dovish lean from Fed Chair Powell at his keynote address this Thursday.

    [USD, JPY]
    The yen has been underperforming amid risk-on positioning in global markets, fitting the currency's often seen inverse correlation with global stock market direction. USD-JPY posted an eight-day high at 106.38, which is a gain of just over 40 pips on yesterday's closing level. The biggest mover out of the main currency pairings and crosses has been EUR-JPY, which was showing a 0.7% gain. The cross printed a six-day high at 125.88. GBP-JPY was not far behind, while AUD-JPY was showing a near 0.5% upward advance. This is a classic forex market pattern during times of notable surges in risk appetite. The August German Ifo business climate indicator beat forecasts, with the July reading revised slightly higher, which added bullish fuel to stock markets. The pan-Europe STOXX 600 is up 0.4%, though remains below recent highs, while the MSCI AC Asia-Pacific rallied by 1.4% to near seven-month highs, and Wall Street yesterday clocked fresh record highs for the S&P 500 and NASDAQ. Encouraging news on the U.S.-China Phase 1 trade deal, and on developments of COVID-19 treatments and vaccinations, have been tonic for investors. 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 low-beta haven currency.

    [GBP, USD]
    Cable lifted on the back of a softer dollar, and gained versus an underperforming yen, though was softer in the case against the euro. The pound pegged an intraday high at 1.3116 to the dollar, and has remained comfortably within the range seen yesterday. EUR-GBP has been re-established back above 0.9000 after rebouding from Friday's six-week low at 0.8942, which reflected a broader weakening in the UK currency. Last week's trade talks between the EU and UK were a flop, with the EU's so-called "level-playing-field" rules and fishing rights remaining seemingly insurmountable sticking points. It can be assumed 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. This will keep the uncertainty going until then. Given the risks of a no deal, or only a narrow deal, we are wary about the pound's outlook. 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 an upward jolt to the unemployment rate, with the aviation, high street retail and hospitality sectors to be hard hit. The UK calendar is quiet until for the remained of the month.

    [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]
    The Canadian dollar has been on an softening streak, with USD-CAD posting a five-day peak at 1.3240. Oil prices have settled, having not sustained gains seen yesterday, despite concerns of disruption to oil production facilities and distribution in the Gulf of Mexico as hurricanes bear down. Crude market narratives have highlighted analyst concerns about flagging demand due to ongoing lockdown measures around the world. In the bigger view, 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 fuelling 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. With the U.S. economy recouping and Treasury yields perking up, the U.S. dollar may also be set for a rebound after a prolonged phase of weakening.

    Paste link in email or IM