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By XE Market Analysis July 9, 2020 7:24 am
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    XE Market Analysis: North America - Jul 09, 2020

    The dollar pared declines as a mostly risk-on session in Asia, led by a continued rally in Chinese stocks, gave way to a less certain session in European markets. The narrow trade-weighted USD index recouped to levels around 96.50 after earlier printing a one-month low at 96.24. EUR-USD ebbed back to the lower 1.1300s after posting a one-month high at 1.1371, which added to what has been a three-week phase of gains. EUR-JPY, also amid a third consecutive week of ascent, printed a peak at 121.98, 2 pips shy of Monday's three-week high, before correcting. The EU's progress towards a EUR 750 bln recovery fund has been supporting the euro in recent weeks. Cable posted a fresh 23-day high at 1.2666 before capping out, in what is the pair's seventh up day out of the last eight trading days. EUR-GBP hit a new three-week low at 0.8946, extending the pronounced reversal out of the three-month high that was seen last week at 0.9179. Market narratives are talking up the technical/momentum case for being bullish, with Cable's 200-day moving average at 1.2698 being highlighted as target by some. USD-JPY, down for a second day, carved out a new low for the month at 107.18. USD-CAD edged out a 16-day low at 1.3489, surpassing yesterday's low by 2 pips. This came with front-month WTI crude futures nudging to a two-day high at $40.88, which has been supportive for oil correlating currencies. Gold prices rose above $1800 for the first time since 2011, a culmination of a 40% gain since May last year, with more recent gains reflecting safe haven demand due to persisting uncertainties about the economic outlook as a consequence of the coronavirus pandemic. The demand for the zero-yielding asset also reflects concerns that the flood of central bank monetary stimulus may at some point spark a surge in inflation.

    [EUR, USD]
    EUR-USD posted a one-month high at 1.1371, adding to an acceleration in what has now been a three-week phase of gains. EUR-JPY, also amid a third consecutive week of ascent, printed a peak at 121.98, which is 2 pips shy of Monday's three-week high. The common currency has also firmed up against other currencies, including the commodity-correlating units, though has remained off recent highs, while outperformance in the pound has dragged EUR-GBP into three-week low terrain. The EU's progress towards a EUR 750 bln recovery fund has been supportive of the euro in recent weeks. The multiannual financial framework fund has been taken as a positive step in recent 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. EU heads of state are expected to meet at the end of next, where an agreement on the details on the recovery fund is expected. Any upset on this front would be a negative for the euro. We take a circumspect view of EUR-USD's upside potential, given the risks of setbacks on the road back to economic normalcy. While there has been an abundance in above-forecast data out of the Eurozone and elsewhere of late, which has been a theme in global data releases since the April lockdown nadir, the pace of recovery is now likely to fall back. This especially looks to be the case given the problematic clusters of outbreaks of new coronavirus infections, which have been causing localised lockdowns across the world. Markets may thus 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.

    [USD, JPY]
    USD-JPY carved out a new low for the month at 107.18 in what is the pair's second consecutive down day, though the yen still weakened against most other currencies. EUR-JPY gained, while the risk-sensitive AUD-JPY cross edged out a two-day high. 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. Strong incoming May and June economic data, as economies rebound from the April lockdown nadir, have become increasingly old news, especially amid 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, despite outward appearances, 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]
    The pound has outperformed today, with gains accelerating during the London morning. Her Majesty's currency was showing gains of 0.4% or more against the dollar, euro, yen and other currencies, as of the late London AM. Cable has posted a fresh 23-day high at 1.2666, in what is the pair's seventh up day out of the last eight trading days. EUR-GBP hit a new three-week low at 0.8946, extending the pronounced reversal out of the three-month high that was seen last week at 0.9179. Market narratives are talking up the technical/momentum case for being bullish, with Cable's 200-day moving average at 1.2698 being highlighted as target by some. There doesn't appear to be any specific catalyst behind the pound's bout of outperformance today, and the currency's former pandemic-era positive correlation with global stock market direction has waned in recent weeks. On the bullish side of the equation there have been signs that both the UK and EU are committed to reaching a trade deal, and the UK government's detailing of fiscal support measures yesterday, which while as expected in magnitude, at GBP 30 bln, were dominated by measures to boost employment. These have offset recent reports that the BoE has been sounding out UK commercial lends about the possibility of negative interest rates.

    [USD, CHF]
    EUR-CHF has fallen back in recent 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. 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 a weaker currency. Regarding the SNB, the central bank left policy settings unchanged at its recent quarterly review, 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 remains Swiss policymakers' central policy guidance.

    [USD, CAD]
    USD-CAD edged out a 16-day low at 1.3489, surpassing yesterday's low by 2 pips. This came with front-month WTI crude futures nudging to a two-day high at $40.88, which has been supportive for oil correlating currencies. The WTI oil benchmark stil remains in a broader consolidation phase after the post-lockdown rally peaked at a three-and-a-half-month high at $41.63 in late June. The sharp rebound in oil demand from the April nadir has been priced in, with focus now on the coronavirus infection rate as economies reopen, which has caused some areas around the world to re-introduce lockdown measures. This backdrop threatens to weigh on, or at least cap, oil prices, along with curtailing the Canadian dollar's upside potential. We have been pencilling in a revisit of USD-CAD one-month high at 1.3716. Support comes in at 1.3484-1.3500, which encompasses the June-23rd three-week low. As for the oil price outlook, we take a neutral view at present. While global demand looks to be flattening out, supply is looking to remain tight. The OPEC+ group are maintaining supply quotas, while U.S. output has fallen from 13.0 mln bpd to 10.5 mln bpd. On the Canadian domestic front, the June employment report will be released tomorrow. We are expecting a 700k headline gain after the 289.6k jump in May, with the unemployment rate seen ebbing to 11.0% from 13.7% in May.

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