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By XE Market Analysis July 17, 2020 7:37 am
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    XE Market Analysis: North America - Jul 17, 2020

    The dollar has weakened against the euro while holding within Thursday ranges against most other currencies. The common currency ran higher, despite Germany's Merkel managing expectations into the start of the EU leaders' summit on the EU recovery fund, saying earlier that "differences are still very big," although remarking that there is a lot of "impetus" going into the discussions. Incoming data, including an as-expected confirmation of preliminary Eurozone June CPI at 0.3% y/y and a 27.9% rebound in Eurozone May construction data, have had little impact. EUR-USD lifted to a high at 1.1427, retracing most of the decline from the three-and-a-half-month high that was set earlier in the week at 1.1452. EUR-JPY, EUR-GBP and other euro crosses have also gained. Cable, meanwhile, held a narrow range near 1.2550. AUD-USD settled above yesterday's three-day low at 0.6963. AUD-JPY did likewise. USD-CAD edged out a two-day high at 1.3589, extending a rebound from Thursday's eight-day low at 1.3500. Front-month WTI crude prices remained in a narrow-range consolidation below the three-week high seen earlier in the week at $41.26. Like forex markets, global stock markets have for the most part been lacking direction. The pandemic remains a concern for investors, and even though the lack of fresh cases in many reopened countries where the virus ran its course (including to no-lockdown, no-mask Sweden) -- which points to herd immunity, with the 2020 virus/all-cause mortality curves now looking like nothing more than a bad respiratory illness season -- is going largely unreported. Offsetting pandemic concerns are expectations for the U.S. and other countries to extend "first wave" fiscal support packages before they expire, along with the proposed EU recovery fund.

    [EUR, USD]
    The euro is firmer across-the-board, despite German Chancellor Merkel managing expectations into the EU leaders' summit on the EU recovery fund, saying earlier that "differences are still very big," although remarking that there is a lot of "impetus" going into the discussions. Incoming data, which included an as-expected confirmation of preliminary Eurozone June CPI at 0.3% y/y and a 27.9% rebound in Eurozone May construction data, have had little impact. An ECB survey of economists found a consensus forecast for an 8.3% GDP contraction in 2020, which is unsurprising for markets. EUR-USD lifted to a high at 1.1412, retracing over two thirds of the decline from the three-and-a-half-month high that was set earlier in the week at 1.1452. EUR-JPY, EUR-GBP and other euro crosses have also gained, though most, like EUR-USD, have so far remained shy of their recent trend highs. Forex markets are clearly taking an optimistic view with regard to EU leaders resolving their differences and green-lighting the EUR 750 bln recovery fund. The proposed 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. One focus in the U.S. will be on the White House, and whether the Trump administration will follow through on its threat to bad Chinese Communist Party leaders from travelling to the U.S.

    [USD, JPY]
    The yen is consolidating after rising against most currencies, outside the case against the dollar, yesterday. One exception has been EUR-JPY, which has floated back toward recent highs on the back of broad euro gains into a meeting of EU leaders about the EU recovery fund. Global stock markets are lacking direction, similar to forex markets. The persisting pandemic remains a concern for investors, and even though the lack of fresh cases in many reopened countries which experienced pronounced infections (including to no-lockdown, no-mask Sweden) -- pointing to herd immunity, with the 2020 virus/all-cause mortality curves now looking like nothing more than a bad respiratory illness season -- is going largely unreported. Offsetting pandemic concerns are expectations for the U.S. and other countries to extend "first wave" fiscal support packages before they expire, while EU leaders are gathering today to try and move the proposed EUR 750 bln recovery fund toward fruition. USD-JPY plied a sub-20 pip range in the lower 107.00s. The BoJ this week left policy unchanged following its review, and downgraded growth forecasts, as had been widely anticipated. Governor Kuroda maintained dovish guidance, noting that there remain various tools that could be utilized for further easing. 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 (a reflection of this was the 2-year UK yield this week dipping below Japan's 2-year yield for the first time ever), 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]
    The pound has been trading neutrally, with Cable settling near 1.2550-1.2600, showing little net change from week-ago levels although having seen some whippy price action in the interim. Cable printed a three-day low at 1.2520 yesterday, while EUR-GBP edged out a three-day high at 0.9096 before running out of upside puff, leaving Tuesday's 17-day high at 0.9116 unchallenged. Expectations for EU leaders to green-light the proposed EUR 750 bln recovery fund at the EU leaders' summit today has been a factor underpinning EUR-GBP recently. From here, we anticipate only limited upside potential for the pound, given the risk that trade discussions between the UK and EU continue without breakthrough. Officials have continued to report that they remain deadlocked over key issues. While there have been reports of "landing zones" on difficult issues coming into view, there have also been reports that the UK government is planning free ports and competitive tax cuts, which would rule out any chance of a broad trade deal being made with the EU. Negotiations are continuing in Brussels, and are scheduled to continue through to the end of the month before resuming on August 17th after the summer break. October is being touted as the deadline, with the UK scheduled to leave the EU's single market at year end. An update on this week's round of talks is likely at some point today.

    [USD, CHF]
    EUR-CHF has lifted from levels near 1.0600 to levels above 1.0750 in recent days, benefiting from broader euro gains as markets anticipate EU leaders making progress on the proposed EUR 750 bln EU recovery fund. This has helped the cross to continue 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 had increased 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, leading 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 two-day high at 1.3589, extending a rebound from Thursday's eight-day low at 1.3500. Front-month WTI crude prices remained in a narrow-range consolidation below the three-week high seen earlier in the week at $41.26. We don't anticipate too much upside potential in oil prices, and by association the Canadian dollar. The OPEC+ group agreed this week to ease output quotas in August, 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. The continued deterioration in U.S-China relations also remains a concern.

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