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By XE Market Analysis July 2, 2020 7:13 am
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    XE Market Analysis: North America - Jul 02, 2020

    The dollar and yen have taken a rotation lower as global stock markets rose on hopes about a vaccine for the coronavirus. Pfizer and Germany's BioNTech, developing one of the 150-plus candidate vaccines, reporting good results in early-stage human trials. In the mix are expectations for the upcoming release of the U.S. June payrolls report to show strong rebound, despite a sub-forecast rise in yesterday's June ADP private jobs report, which have been a boon to stock markets and, indirectly, a negative for the dollar with forex markets more sensitive to shifting risk premia than economic data differentials. The narrow USD index (DXY) fell nearly 0.5% in printing an eight-day low low at 96.81. EUR-USD concurrently pegged an eight-day high at 1.1303. Cable posted an eight-day high at 1.2528, contributing to sterling's rebound after recent underperformance. USD-JPY settled in the low-to-mid 107.00s after dropping back from the three-week high that was seen early yesterday. Other yen crosses, including the risk-sensitive AUD-JPY, have seen a similar price action in lifting out of lows, with the yen unwinding some of yesterday's safe haven gains. As for the U.S. jobs report, we peg the June nonfarm payroll headline with a gain at 2,500k, as nearly every measure of economic activity has moved notably higher since the May BLS survey week, though with disappointingly modest improvement in the initial and continuing claims figures.

    [EUR, USD]
    EUR-USD printed eight-day high at 1.1303, which was a product of broader dollar softness, which in turn has been concomitant with contain gains in European stocks and S&P 500 futures, the latter of which was showing a gain of 0.6% heading into the New York interbank open. U.S. June payrolls data is up today, and is expected to show a continued strong rebound, though markets have become somewhat desensitized to solid May and June data after the April lockdown nadir, with primary focus falling on the infection rate of the coronavirus. The U.S. has seen new infection rate highs in coronavirus cases this week. Markets remain trapped in a constant state of tweaking risk premia, which for EUR-USD means downside pressure when the dollar gains on safe haven demand, and upside pressure when things are looking more rosy. The EU's proposed EUR 750 bln multiannual financial framework fund has been taken as a positive step in analysts commentaries, being a hinge factor of some recent bullish euro calls, on the basis of it reducing eurozone breakup risk while creating a new liquid and higher-yielding AAA asset, which will attract inflows from real money investors and reserve managers. We take a slightly more circumspect view given the risks of setbacks on the road back to economic normalcy, which likely won't be achieved until such time there is a vaccine or effective treatment for the SARS Cov-2 coronavirus, and which in turn should keep the dollar prone to bouts of outperformance. Note that U.S. markets will be closed tomorrow for the Independence Day holiday.

    [USD, JPY]
    USD-JPY has settled in the low-to-mid 107.00s after dropping back from the three-week high that was seen early yesterday. Other yen crosses, including the risk-sensitive AUD-JPY cross, have seen a similar price action, with the yen losing haven demand today as global stock markets stage a tentative rebound on hopes about a vaccine for the coronavirus, with Pfizer and Germany's BioNTech, developing one of the 150-plus candidate vaccines, reporting good results in early-stage human trials. Markets are also looking for a strong rebound in U.S. employment in today's June payrolls report, despite a sub-forecast rise in the June ADP private jobs report (released Wednesday). Shifting risk premia in global markets looks likely to remain a primary driver of direction for the Japanese currency. 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 built up a reliable reputation as a haven currency. Market participants are grappling with glass-half-empty and glass-half-full arguments. There are signs of new waves of coronavirus infections as economies reopen, which has already seen social restrictions being re-introduced in some places, although the overall trend remains to de-restriction. Geopolitical issues remain wildcards, although, on the U.S.-China front, its pretty clear that President Trump values his trade deal with Beijing while at the same time wanting to appear tough on China, five months out from the presidential election. On the glass "half full" side, there is the expectation that the massive stimulus by global central banks is primed to give risk assets a major boost, which in the event would likely see the Japanese currency underperform.

    [GBP, USD]
    Cable pegged an eight-day high at 1.2528, contributing to sterling's rebound after recent underperformance which on Monday culminated in respective one- and three-month lows against the dollar and euro. The new lockdown measures being re-introduced in city of Leicester due to a spike in coronavirus cases there is an ominous sign of the challenges being faced as the UK economy reopens, while recent weakness in the pound was largely on concerns about the risk of the UK leaving it transitory membership of the EU's single market at year end and shifting to trading on less-favourable WTO terms. There have also been concerns that the BoE is prematurely tapering its QE program. UK data this week showed an unexpected downward revision in final Q1 GDP data, to -2.2% q/q from -2.0% q/q reported initially. As in other economies, focus is on the r-rate of new coronavirus infections amid the de-restricting in social and economic activity. The UK's hospitality industry will reopen on July 4th, which along with a halving in government's two-metre social distancing guideline, will present a challenge to maintaining a sub-1.0 coronavirus infection r-rate. In the weeks and months ahead, we expect the pound to remain more prone to appear on the underperforming list of currencies rather than on the outperforming list. The UK-EU post-Brexit trade issue is not likely to be resolved until October, the deadline for when an agreement has to be made before the UK's access to the single market ends. The risk is that the only a narrow deal, or no deal at all, happens, leaving the UK on much less favourable terms of trade. The pound is running at about a 11-12% trade-weighted discount compared to the average levels in the several years preceding the vote to leave the EU in June 2016.

    [USD, CHF]
    EUR-CHF has fallen back over the last couple of weeks, though has continued to trade comfortably above the series of lows near 1.0500 that were seen from March through to mid May. Committed SNB intervention prevented the 1.0500 level from being breached over this period, when the consequences of the pandemic increasing bets about a possible breakup of the euro area, and even the EU. However, since the Franco-German backed EU recovery fund gained traction in mid May, these bets have gone sour, which led to a rebound in EUR-CHF. The recovery fund is up for ratification at current EU summit, which concludes tomorrow. Assuming this passes, as looks likely (though its form still remains unclear), this should keep EUR-CHF supported for a while. Further out, the Swiss economy will likely be better able to recover from the pandemic era than the eurozone economy. Along with Swtizerland's massive current account surplus, these are factors that suggest upside potential for EUR-CHF will be limited, regardless of the SNB's desire for weaker franc. Regarding the SNB, the central bank left policy settings unchanged at its quarterly review last week, reaffirming that aggressive intervention will remain the main tool to fight the impact of the coronavirus pandemic on the franc. SNB chief Jordan stressed that the currency remains "highly valued" and repeated that the central bank will continue to sell it as needed. The SNB is now forecasting a contraction in economic activity of 6% this year, the most severe recession since the 1970. The SNB also trimmed inflation forecasts, though it is pretty clear that policymakers are reluctant to go below the current level of -0.75% for the key policy rate. Negative for longer remained Swiss policymakers' central policy guidance.

    [USD, CAD]
    USD-CAD edged out a two-day peak at 1.3612, with the oil-correlating Canadian dollar trading softer despite the cautious risk-on backdrop in global markets. Front-month WTI crude prices have settling near $40.00, below the nine-day high that was seen yesterday at $40.58.The sharp rebound in oil demand from the April nadir has been priced in, with focus now on the infection rate as economies reopen, with some areas -- including various states in the U.S., the cities of Leicester in the UK and Melbourne in Australia, among other areas -- being forced to re-start economic-sapping social distancing rules. This backdrop threatens to weigh, or at least cap, oil prices, along with capping the Canadian dollar's upside potential. USD-CAD last week peaked at a one-month high at 1.3716. Support comes in at 1.3484-1.3500, which encompasses the June-23rd three-week low.

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