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By XE Market Analysis July 21, 2020 7:43 am
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    XE Market Analysis: North America - Jul 21, 2020

    A risk-on positioning formation has been ensuing in currency markets, which has meant dollar and yen underperformance alongside commodity currency outperformance. The narrow trade-weighted USD index edged out a fresh three-and-a-half month low at 95.62, which is a culmination of a clear three-week downtrend. The euro is trading at modestly softer levels against the dollar and most other currencies, with the forex market looking to have priced-in the green lighting of the EU recovery fund. EUR-USD has settled around 1.1450, below the three-and-a-half month peak seen yesterday at 1.1469. EUR-JPY has concurrently settled off yesterday's six-week high, while other euro crosses, most notably EUR-GBP, have also ebbed from highs. The pound has rallied today, again displaying its pandemic era positive correlation with global stock markets. Cable hit a six-week high at 1.2716, while EUR-GBP dropped to an eight-day low at 0.9004. USD-JPY has been buoyant, though has remained below the 13-day high that was seen yesterday at 107.53. The risk-sensitive AUD-JPY cross, meanwhile, lifted to a six-week high at 76.00, underpinned by rallying global stock markets amid signs that EU leaders are in the home stretch to approving the 750 bln euro recovery fund. Recent positive news about trails in candidate vaccines for the coronavirus have also been lifting investor spirits. AUD-USD printed a high at 0.7087, the highest level seen since April 2019. USD-CAD dipped to a six-week low at 1.3472. This was concomitant with front-month WTI oil futures trading above $42.00 for the first time since early March.

    [EUR, USD]
    The euro is trading at modestly softer levels against the dollar and most other currencies, with the forex market looking to have priced-in the green lighting of the EU recovery fund. EUR-USD has settled around 1.1450, below the three-and-a-half month peak seen yesterday at 1.1469. EUR-JPY has concurrently settled off yesterday's six-week high, while other euro crosses, most notably EUR-GBP, have also ebbed from highs. Expectations about the EU recovery fund has 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]
    USD-JPY has been buoyant, though has remained below the 13-day high that was seen yesterday at 107.53. The risk-sensitive AUD-JPY cross, meanwhile, lifted to a six-week high at 75.84, underpinned by rallying global stock markets as EU leaders agreed on the 750 bln euro recovery fund. Recent positive news about trails in candidate vaccines for the coronavirus have also been lifting investor spirits. The MSCI Asia-Pacific index rallied by over 1.5% today, nearing the four-month highs seen earlier in July. The S&P 500 index rallied to a five-month peak on Wall Street yesterday, and S&P 500 futures are showing gains of over 0.6% in the overnight session. Europe's STOXX 600 was up by over 1%, as of the late AM session. 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]
    Sterling has found itself on the outperforming list of currencies today, again displaying its pandemic era proclivity to positively correlate with global stock markets. Cable hit a six-week high at 1.2716, while EUR-GBP dropped to an eight-day low at 0.9011, extending a sharp correction from the three-week peak that was seen yesterday at 0.9140. The drop in EUR-GBP has in part been fuelled by profit taking of euro longs as EU leaders reached a compromise on the EU recovery fund. The pound still remains the weakest currency on the year-to-date out of the currencies we keep tabs on, currently showing an average decline of over 5.5% against the dollar, euro and yen, and an average 3% fall versus the commodity-correlating dollar bloc currencies. The UK has been comparatively exposed to the pandemic and lockdowns, having an open economy with a large current deficit and large financial sector. The hard hit leisure and hospitality sectors, which are proportionately bigger in the UK than most peers, is also a factor, and many economists are anticipating a consequently lagging economic recovery. Then there is the yet-to-be-finalized Brexit issue. The UK is on a course to leave the EU's single market by year end, irrespective of whether a trade deal is reached with the EU. Officials involved in negotiations 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. Discussions are scheduled to continue through to the end of the month before resuming on August 17th. October is being touted as the deadline.

    [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 dipped under 1.3500 for the first time since June 11th, making a low at 1.3488. This was concomitant with front-month WTI oil futures lifting back above $41.00, drawing back in on the four-week high at $41.26. Oil, and by association the Canadian dollar, and other oil-correlating currencies, have been boosted by a broader risk-on theme in global markets. EU leaders reached a compromise that will green light the 750 bln EU recovery fund, while the U.S. is working on a fresh fiscal package that is likely to be reach in the first week of August, which is likely to amount to between $1 tln and $1.5 tln. Australia and other nations are also working on new fiscal support measures, aimed in part to replace "first wave" responses to the pandemic. Positive trial results in several of the leading coronavirus vaccine candidates have also been lifting risk appetite in asset markets, giving higher beta commodity currencies buoyancy. Downside risks for the Canadian dollar include the OPEC+ group's course to easing output quotas, which could weigh on oil prices. The coronavirus remains a risk, too, should fresh outbreaks lead to widespread lockdowns, though its looking increasing likely that large-scale lockdowns won't been needed. The deterioration in U.S-China relations also remains a potential concern.

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