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By XE Market Analysis August 31, 2020 7:14 am
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    XE Market Analysis: North America - Aug 31, 2020

    The dollar posted fresh trend lows against some currencies. The framework regime shift at the Fed, announced by Chairman Powell last week, effectively reaffirmed the dollar softening trend, concomitantly with shorter dated inflation-adjusted Treasury yields posting fresh lows. The yields on the 5- and 7-year real constant maturity Treasury notes were indicated on Friday at new seven-year-plus lows, at -1.40% and -1.26%, respectively (down by a respective 15 bp and 11 bp from week-before levels). The narrow trade-weighted USD index (DXY) logged a new 27-month low at 92.15, and is set to rack August up as a fourth consecutive month of descent. EUR-USD printed a high at 1.1930, which drew back in on the 27-month high seen a couple of weeks back at 1.1967. This puts the pair on course to make this the thirteenth up week that's been seen out of the last sixteen weeks. Cable posted a fresh eight-month peak at 1.3367. AUD-USD lifted to a new trend peak at 0.7382, which is the loftiest level the pair has seen since December 2018. NZD-USD saw an eight-month high. USD-CAD sank back below 1.3100 but remained shy of Friday's seven-month low at 1.3045. Like other oil correlating currencies, the Canadian dollar lost upside momentum as crude prices pared gains from the highs that were seen mid last week. Hurricane Laura wasn't as disruptive to Gulf of Mexico crude production as feared. USD-JPY is moderately higher on the back of yen underperformance, rising to the upper 105.00s, retracing some of the declines seen on Friday from levels near 107.00. AUD-JPY, meanwhile, has lifted by over 0.7% but has remained short of last week's 18-month peak. EUR-JPY and other yen crosses have also lifted, but have also remained below recent highs.

    [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]
    USD-JPY is moderately higher on the back of yen underperformance, rising to the upper 105.00s, retracing some of the declines seen on Friday from levels near 107.00. AUD-JPY, meanwhile, has lifted by over 0.7% but has remained short of last week's 18-month peak. EUR-JPY and other yen crosses have also lifted, but have also remained below recent highs. 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 posted a fresh eight-month peak at 1.3367. Markets continue to take a sanguine view of the apparently stalled progress in 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. Prime Minister Boris Johnson's cabinet are full of Brexit ideologues; that Brexit is an opportunity to craft the UK on the Singaporean model, as an outwardly-oriented, low-tax and pro-trade hub. Signing up to the EU's level-playing-field rules is not consistent with this view, and there is only so far that the EU is likely to bend. The government, which has over four years on the electoral clock and a large majority in parliament, is in a position to weather short-term economic damage that leaving the EU's single market without a comprehensive near trade deal would surely cause. Note that when UK leaves the single market, it will not just be leaving free trade with the EU but also the 40 free trade deals the EU has across the globe. Another downside risk for the pound 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 last week).

    [USD, CHF]
    EUR-CHF has settled back to narrow range trading in the mid 1.0700s having failed to sustain recent forays above 1.0800. The influence of the SNB's intervening hand may have been at play during recent the upside bursts. Total Swiss sight deposits of francs have risen by over 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 has sunk back below 1.3100 but remained shy of Friday's seven-month low at 1.3045. Like other oil correlating currencies, the Canadian dollar lost upside momentum as crude prices paired gains from the highs that were seen mid last week. Hurricane Laura wasn't as disruptive to Gulf of Mexico crude production as feared.

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