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By XE Market Analysis August 28, 2020 6:41 am
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    XE Market Analysis: North America - Aug 28, 2020

    The dollar's weakening bias reimposed as the lows seen in the immediate wake of Fed Chair Powell's announcement of a framework regime change (lower interest rates for longer as a consequence of more tolerance on inflation risks) were surpassed during the London morning. The narrow trade-weighted USD index (DXY) dropped by over 0.6% in posting a nine-day low at 92.28. EUR-USD concurrently clocked a 19-day high at 1.1920. In the mix was a notably sharp drop in USD-JPY, which plunged by well over a big figure from a two-week high that was seen in Tokyo trading at 106.94. A one-week low was pegged at 105.57. News that Japanese PM Abe resigned for health reasons sparked safe-haven buying of the Japanese currency, as it hit Japanese stock markets, while flagging stock markets in Europe were also a factor. The Nikkei 225 finished 1.4% for the worse. U.S. yields reversed some of the post-Powell rise, while inflation-adjusted U.S. Treasury yields remained heavy, with the 5-year real constant maturity yield, for instance, indicated at -1.34% at yesterday's close, which is fractionally above the -1.35% seven-year-plus low seen on the day before. Elsewhere, yen crosses dropped similarly to USD-JPY, although by a lesser magnitude. AUD-JPY pulled back after earlier making a 16-month peak. The dollar bloc currencies have been outperforming. AUD-USD has risen above 0.7300 for the first time since December 2018, while USD-CAD printed a fresh seven-month low at 1.3059. Cable hit a fresh eight-month high at 1.3296, floated by resuming dollar weakness. Data today included a much stronger than expected Eurozone ESI economic confidence index, which rose to 87.7 in the reading for August, up from, 82.4 in the previous month, which helped underpin EUR-USD.

    [EUR, USD]
    EUR-USD clocked a 19-day high at 1.1920, reflecting the rekindling of the dollar's softening bias after Fed Chair Powell confirmed a shift in monetary policy strategy that will allow a lower-for-longer approach on interest rates. While longer dated sovereign yields in the U.S. and elsewhere have risen, with curves steepening, inflation-adjusted U.S. Treasury yields have remained heavy. The 5-year real constant maturity yield, for instance, indicated at -1.34% yesterday, which is fractionally above the -1.35% seven-year-plus low seen on the day before. This should keep EUR-USD underpinned, though Wall Street's record-breaking bull trend and recovering U.S. economy are providing offsetting forces. Also in the mix today was a much stronger than expected Eurozone ESI economic confidence index, which rose to 87.7 in the reading for August, up from, 82.4 in the previous month. This is still some way from readings firmly above 100 that were seen before of the pandemic, but this is still the best number since March, with industrial as well as services confidence improving strongly. The ESI report rounds out a month of generally stronger sentiment indicators out of the Eurozone. The impact of renewed restrictions for hospitality and travel operators is likely to show up in incoming data, however, as it already did in preliminary August services PMI surveys. Governments in most European countries (Sweden being the main exception) remain somewhat trigger happy in imposing localised restrictions in response to upward flurries in positive coronavirus tests, even though there hasn't been any significant correspondence of actual public health events (serious illness and associated hospitalisations and deaths). The death rate from all respiratory illnesses outside Covid-19 has been greater than for Covid itself for some time now, and all-cause mortality rates continue to trend below long-term averages. Most media outlets are not reporting this, and remain resolutely focused on new cases, maintaining the 'feardemic' and consequential panicky government responses.

    [USD, JPY]
    The yen has seen quite a sharp rebound after posting fresh lows earlier during Tokyo trade. USD-JPY is showing a loss of just over 0.6% at prevailing levels, posting a low at 105.86. That's over a big figure down on the two-week high that was pegged at 106.94. News that Japanese PM Abe has resigned for health reasons seems to have been a factor in sparking safe-haven buying of the Japanese currency, insofar as it hit Japanese stock markets, alongside a backdrop of mixed stock market performance in Europe. A re-establishing bearish dollar sentiment has also been a factor weighing on USD-JPY. Fed Chair Powell yesterday signalled a shift to average inflation targeting, which will be lower-for-longer in terms of interest rate policy. EUR-JPY has dropped back to the lower 126.00s after earlier coming within a pip of the 16-month high that was seen in mid August, at 126.77. AUD-JPY has dropped by over 50 pips from the 16-month peak that was seen during the Asia-Pacific session, at 77.95. In the bigger picture, most yen crosses have been trending higher since May, with the Japanese currency tracking inversely with global stock market direction. 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 profile of being a low-beta haven currency.

    [GBP, USD]
    Cable has hit a fresh eight-month high at 1.3290, floated by resuming dollar weakness after coming through some post-Fed announcement chop. GBP-JPY earlier printed a six-month peak today, before retreating somewhat with the yen having rebounded from lows. EUR-GBP yesterday saw a two-month low at 0.8928, since settling back above 0.8950. The recovery in both the domestic and global economy from the more extreme phase of lockdowns that were seen earlier in the year has been a positive for the UK currency, which had underperformed during the worst of the panic (the UK being a deficit nation with an open economy). Markets are also, for now, taking a sanguine view of the flop-out in last week's trade talks between the EU and UK. All things Brexit go down to the wire, and expectations for any real progress are low until much nearer the deadline, which is widely accepted as being the EU's leaders' summit in October. The consensus view is that a deal will be struck. We are wary. There are grounds to doubt there can be anything other than a narrow deal, given the intransigence on the EU's level-playing-field rules and fishing rights. A bear-bones deal or a no-deal outcome are a risk. Another risk is that the UK government's pandemic-era 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 wage support scheme protected about 9.5 mln jobs at the height of the lockdown, though there remains up to 1.5 mln jobs at risk of being chopped in October, unless the government extends its support scheme (as Germany did with its plan yesterday).

    [USD, CHF]
    EUR-CHF has settled back to narrow range trading in the mid 1.0700s having failed to sustain gains seen last week, which produced a two-month high at 1.0853. The influence of the SNB's intervening hand may have been at play. 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 printed a fresh seven-month low at 1.3070 today. The Fed's policy framework regime shift, which translates as lower-for-longer with regard to interest rates, has weighed on the U.S. dollar while maintaining an overall risk-on sentiment in markets (notwithstanding some bouts of profit taking in some markets). In the bigger picture, USD-CAD has been trending lower 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. The still unfolding coronavirus pandemic and geopolitical tensions also remain on the radar, should they derail the recovery in global asset markets.

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