Home > XE Currency Blog > XE Market Analysis: North America - Jul 10, 2020

AD

XE Currency Blog

Topics7381 Posts7426
By XE Market Analysis July 10, 2020 6:55 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5305
    XE Market Analysis: North America - Jul 10, 2020

    The dollar lifted out of lows seen during the Asia-Pacific session ahead of the London open. This came as European stock markets posted modest gains, and with U.S. index futures having pared back some of their overnight session declines. The U.S. 10-year T-note yield has also come close to testing its April low at 0.570%, which has been cited as a dollar negative in some market narratives. Risk sentiment in markets remains fragile. U.S.-China tensions continue to simmer, with Beijing stating that it will take countermeasures against U.S. sanctions on the Xinjiang human rights issue. On the coronavirus pandemic front, Hong Kong, which is one of the many emerging hot spots of second-wave infections, reported its second biggest daily rate of new cases, which along with multiplying coronavirus infections across the U.S. and in other places across the world, are on investors' worry list. Against this backdrop the yen has outperformed. USD-JPY printed a 16-day low at 106.71. EUR-JPY and the risk-sensitive AUD-JPY, among most other yen crosses, also dropped. EUR-USD, meanwhile, lifted out of a three-day low at 1.1258, and Cable rebounded back towards 1.2500 level after printing a two-day low at 1.2555. USD-CAD pegged an 11-day high at 1.3632. Front-month WTI futures fell to an 11-day low at $38.54, extending the correction from the 17-day high seen earlier in the week at $41.63. The North American calendar today is highlighted by the release of Canada's June employment report. 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.

    [EUR, USD]
    EUR-USD has lifted out of a three-day low at 1.1258 on the back of a broadly softer dollar as European stock markets posted modest gains and with U.S. index futures having pared some of their overnight-session declines. The U.S. 10-year T-note yield has come close to testing its April low at 0.570%, too, which has been a dollar negative. Risk sentiment in markets remains fragile. U.S.-China tensions continue to simmer, with Beijing stating that it will take countermeasures against U.S. sanctions on the Xinjiang human rights issue. On the coronavirus pandemic front, Hong Kong, which is one of the many emerging hot spots of second-wave infections, reported its second biggest daily rate of new cases, while multiplying coronavirus infections across the U.S. and in other places across the world, have spooked investors. We have been taking 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, a theme in global data releases since the April lockdown nadir, the pace of recovery is now likely to fall back. 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 printed a 16-day low at 106.71. EUR-JPY and the risk-sensitive AUD-JPY, among most other yen crosses, also dropped. The dynamic reflects ensuing risk-off positioning in currency markets, as global stock markets and other assets decline on concerns about economically disruption spikes in new coronavirus infections. The drop in the U.S. 10-year T-note yield today, which is near to testing the April low at 0.570%, is also being cited in market narratives as being a USD-JPY selling cue. 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. Geopolitical issues remain wildcards. 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 rebounded back towards the 1.2600 level after printing a two-day low at 1.2555, though remaining well short of Thursday's 16-day at $1.2671. The pound has been an outperformer this week, with Her Majesty's currency showing gains against the dollar, euro, yen and other currencies. EUR-GBP yesterday hit a three-week low at 0.8944, extending the pronounced drop from 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. On the bullish side of the equation, there have been signs that both the UK and EU are committed to reaching a trade deal, along with 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 rose to an 11-day high at 1.3632. Front-month WTI futures fell to an 11-day low at $38.88, extending the correction from the 17-day high seen earlier in the week at $41.54. The WTI oil benchmark 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's 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 is up today. 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.

    Paste link in email or IM