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By XE Market Analysis July 15, 2020 7:33 am
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    XE Market Analysis: North America - Jul 15, 2020

    The dollar has remained on a softening track against most other currencies, while the euro has remained broadly underpinned amid expectations for EU leaders to green-light the proposed EUR 750 bln recovery fund this week. The pound managed to rebound after underperforming over the prior two days. Risk appetite has been buoyant, with European and Asia stock markets rallying and U.S. equity index futures gaining, underpinned by news that U.S. biotech company Moderna's candidate vaccine for the SARS Cov-2 coronavirus was shown in an early-stage trial to be safe while successfully provoking immune responses in all 45 of the volunteers. The narrow trade-weighed USD index carved out a fresh one-month low at 95.89, drawing in on the four-and-a-half-month low seen in June at 95.72. EUR-USD rallied to its highest level since early March at 1.1445. Cable rallied to a two-day high at 1.2626, extending a strong rebound from Tuesday's eight-day low at 1.2479. The rise in Cable wasn't just a softer dollar story, as the pound concurrently rebounded against the euro, driving EUR-GBP to a 0.9051 low, extending a correction from yesterday's two-week high at 0.9115. GBP-JPY also lifted to a two-day high. USD-JPY drifted under 107.00, expecting a moderate correction from yesterday's one-week high at 107.44. The risk-sensitive AUD-JPY cross printed a five-week high at 75.29. AUD-USD similarly reached a five-week peak, at 0.7018. The BoJ left policy unchanged, as had been widely anticipated. Governor Kuroda maintained dovish guidance, noting that there remain various tools that could be utilized for further easing.

    [EUR, USD]
    EUR-USD posted a new trend high at 1.1445, the highest level seen since the early March high at 1.1494. The pair has been floated by a combo of broader dollar softness, which has come amid a risk-on backdrop, and by the recent broad underpinning the euro has seen amid expectations for EU leaders to green-light the proposed EUR 750 bln recovery fund this week. The coronavirus pandemic currently looks a lot more under control in Europe than in the U.S., where spikes in infections across 41 states is currently ensuing. As for the EU's recovery fund, the proposed multiannual financial framework fund has been taken as a positive step in recent analyst 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. A downside risk for EUR-USD would be any rekindling in risk aversion in global markets, which would likely drive the pair lower on the back of safe haven demand for dollars.

    [USD, JPY]
    The yen has recouped earlier losses, nudging USD-JPY below 107.00. A broadly softer dollar has been influencing, though some yen crosses have also dipped, with the risk-sensitive AUD-JPY, for instance, ebbing under 75.00 after earlier printing a one-week high at 75.29. The BoJ left policy unchanged following its policy review today, as had been widely anticipated. Governor Kuroda maintained dovish guidance, noting that there remain various tools that could be utilized for further easing. Assuming the risk-on backdrop persists, we wouldn't expect yen gains to sustain, although it must be said that markets are fickle and apt to turn quickly from risk takers to risk avoiders. 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.

    [GBP, USD]
    Cable rallied to a two-day high at 1.2627, extending a strong rebound from Tuesday's eight-day low at 1.2479. While dollar weakness has been at play, the pound concurrently rebounded against the euro, driving EUR-GBP to a 0.9051 low, extending a correction from yesterday's two-week high at 0.9115. GBP-JPY also lifted to a two-day high. UK June inflation data showed headline CPI lifting to 0.6% y/y from 0.5% y/y. This was slightly warmer than expected, with the consensus forecast having been for a dip to 0.5%. While CPI remains well below the BoE's 2.0% target, the data may at the least provide a counter to arguments on the Monetary Policy Committee for negative interest rates. From here, we anticipate only limited upside potential for the pound, with risks remaining to the downside. Yesterday's data showing much weaker than expected UK May GDP figure, of 1.8% m/m growth versus the median forecast for 5.5%, is a backdrop negative. The independent Office for Budget Responsibility is forecasting UK GDP shrinking by 10% in 2020, too, while the 2-year Gilt yield also dipped below that of the 2-yeawr JGB for the first time ever. These factors arrived with the UK currency trading at relatively lofty levels following two week phase of outperformance, and with signs from the UK and EU trade discussions suggesting that the two sides are unlikely to agree anything but a narrow trade deal.

    [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 has ebbed to a two-day low at 1.3568, weighed down by a combination of broader U.S. dollar softness and a broadly firmer Canadian currency, which has been concomitant with a bout of risk-on positioning in global markets. Front-month WTI crude futures have rotated higher following a phase of sub-$40 pricing, printing a six-day high at $40.99, which has been supportive of oil-correlating currencies, including the Canadian dollar. Fresh news of progress on vaccine development for the SARS Cov-2 coronavirus has helped boost risk appetite. We don't anticipate too much upside potential in oil prices, and by association the Canadian dollar. The OPEC+ group look to be headed for a easing in output quotas at the end of July, while significant parts of the U.S., and other localities around the world, are re-introducing lockdown measures in response to spikes in coronavirus infections. USD-CAD support comes in around 1.3534-35 to 1.3550.

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