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By XE Market Analysis July 20, 2020 7:42 am
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    XE Market Analysis: North America - Jul 20, 2020

    The euro has been in the outperforming lane amid signs that EU leaders are heading for a compromise on the EU recovery fund. The EU leaders' summit has been dragging on since Friday, and will resume today at 14:00 GMT (10:00 ET). EUR-USD pegged a fresh four-and-a-half-month high at 1.1467, drawing nearer to the early March peak at 1.1494, which is the loftiest level seen since January 2019. EUR-JPY lifted by over 0.5% on route to a six-week high at 122.98, and EUR-GBP lifted to a three-week high at 0.9140. Elsewhere, Cable recouped to levels near 1.2550 after ebbing to a 1.2519 low. Yen underperformance floated USD-JPY to a 12-day high at 107.51, and AUD-JPY posted a five-day high at 15.14. AUD-USD traded modestly softer, making a low at 0.6974. The pair has been lacking direction since making a six-week high at 0.7039 last week. USD-CAD edged out a five-day high at 1.3600. Front-month WTI crude futures have been holding a narrow range nar $40.50, lacking direction after last week posting a four-week high at $41.26. Stock markets in Asia have mostly traded lower, and S&P 500 futures are showing a decline of over 0.6%, more than wiping out the gains seen during the regular session on Wall Street on Friday. Concerns about the coronavirus remain, though daily new cases in some recent hot spots, including Brazil, are now coming down notably. A non-hysterical, agenda-free look at the data continues to show, especially considering that many asymptomatic and mild symptom cases don't get tested (estimated to be the vast majority), that 99%-plus will recover fully, with the median of Covid-19 cases who succumb being over 80. The all-case mortality curve in Europe is now below the long term trend. Regardless of the not-anywhere-near-as-bad-as-initially-feared data on the coronavirus, the impact of lockdowns and persisting shifts in consumer behaviour will restrict potential for economies to recover to pre-pandemic activity levels.

    [EUR, USD]
    EUR-USD remained buoyant after pegging a fresh four-and-a-half-month high at 1.1467, which drawed nearer to the early March peak at 1.1494, the loftiest level seen since January 2019. EUR-JPY lifted by over 0.5% on route to a six-week high at 122.98, and EUR-GBP lifted to a three-week high at 0.9140. This comes with EU leaders looking to be heading for a compromise on the EU recovery fund, expectations for which having been 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 would 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]
    Modest yen underperformance today was enough to float USD-JPY to a 12-day high at 107.51, and AUD-JPY to a five-day high. EUR-JPY scaled to a six-week peak, aided by euro outperformance today. 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 drawing nearer to green-lighting the EUR 750 bln recovery fund. The BoJ this month 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]
    Cable has recouped to the upper 1.2500s after ebbing to a 1.2519 low in Asia. The pair is lacking direction overall with the pair near to midway levels of the range that's been persisting since April. EUR-GBP pegged a three-week high at 0.9140, underpinned by broader firmness in the euro as EU leaders draw closer to green-lighting the EU recovery fund. We have been noting downside risk 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 scheduled to continue through to the end of the month before resuming on August 17th. October is being touted as the deadline, ahead of the UK's scheduled year-end departure from the single market. On the coronavirus front, despite continued socio-psychological-political hysteria, the graphs of the key metrics (new cases, deaths, all-cause-mortality) tell a tale of quite bad respiratory illness season that has come and now largely gone, which fits the broad picture in Europe (including Sweden, which didn't go lockdown and has not mandated the use of face masks). Aside from the trade negotiations, the focus over the coming week will be on the preliminary July PMI survey data (due Friday), which is likely to show a further plateauing in the rebound from the lockdown lows. June retail sales data is also up. Data have been showing that the UK recovery has been lagging peers. The relatively large size of the leisure and hospitality sectors, which have been hardest hit by the pandemic, accounts for this.

    [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 five-day high at 1.3600. Front-month WTI crude futures have been holding a narrow range nar $40.50, lacking direction after last week posting a four-week high at $41.26. We don't anticipate too much upside potential in oil prices, and by association the Canadian dollar. The OPEC+ group last week agreed 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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