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By XE Market Analysis July 24, 2020 6:48 am
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    XE Market Analysis: North America - Jul 24, 2020

    The yen has outperformed as risk aversion took a firm grip on global markets, though the risk-off theme was paused by above-forecast readings in preliminary July PMI survey data out of Europe. The dollar has remained on a softening path, with the narrow trade-weighted USD index (DXY) carving out a fresh 22-month low at 94.57. The dollar has lost appeal partly on the advent of the EU's recovery fund, seen as a milestone by many analysts that has served to tip the balance away from the dollar, and partly amid expectations for dovish guidance from the Fed at next week's FOMC, with some speculating that the U.S. central bank is considering yield curve targeting. A Reuters survey highlighted increasing pessimism about the nearer-term U.S. outlook given the extent of localized lockdown measures in response to the spike in coronavirus cases across many southern and western states. Intel also underwhelmed markets in its guidance for Q3 earnings. U.S.-China tensions continue to simmer, too. Against this backdrop, EUR-USD remained firm, although off from the 21-moth peak that was seen yesterday at 1.1628. USD-JPY dropped by 0.5% to a one-month low at 106.36. Yen crosses were concurrently weak, driven by safe haven demand for the yen. EUR-JPY fell to a two-day low at 123.18, extending a correction from Wednesday's seven-week peak at 124.30. AUD-JPY has been the biggest mover of the day so far, dropping 0.8% to a three-day low at 75.16. AUD-USD fell by a lesser magnitude, but still managed to peg a three-day low, at 0.7074. USD-CAD lifted to a two-day high at 1.3445. Oil prices have remained heavy after yesterday sinking to three-day lows. Cable edged out a fresh six-week high at 1.2773 before tipping lower. The pair has been trending higher for about three weeks, though recent daily price action has been jagged and upside momentum has been waning, with the pound having been weakening against other currencies on signs, and confirmation at a press conference yesterday, that the UK and EU remain deadlocked on key issues in trade talks.

    [EUR, USD]
    EUR-USD has remained firm, but has thus are remained below the 21-moth peak that was seen yesterday at 1.1628, despite a solid beat in preliminary July Eurozone PMI data. EUR-JPY, in contrast, fell to a two-day low at 123.18, extending a correction from Wednesday's seven-week peak at 124.30. The cross has been driven by safe haven demand for yen today as global asset markets tumble, while EUR-USD has remained buoyed by ongoing dollar weakness. The narrow trade-weighted USD index (DXY) carved out a fresh 22-month low at 94.57. The dollar has lost appeal partly on the advent of the EU's recovery fund, seen as a milestone by many analysts that has served to tip the balance away from the dollar, and partly amid expectations for dovish guidance from the Fed at next week's FOMC, with some speculating that the U.S. central bank is considering yield curve targetting (which we don't anticipate anytime soon). A Reuters survey highlighted increasing pessimism about the nearer-term U.S. outlook given the extent of localized lockdown measures in response to the spike in coronavirus cases across many southern and western states. Intel also underwhelmed markets in its guidance for Q3 earnings.

    [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]
    The pound popped higher on much stronger than expected preliminary July UK PMI headlines before turning lower, back to near net unchanged levels against both the dollar and euro. Cable printed a post-data high at 1.2746 before capping out, with the market lacking the impetus to challenge the six-week high that was seen during Tokyo trading at 1.2773. While the preliminary July UK PMI surveys smashed expectations, with the composite headline surging to a five-year high of 57.1, up from 47.7 in the final reading for June and well up on the median forecast for a 50.8 reading, the surveys also highlighted weak spots. Many service providers reported that business capacity remained limited and operating costs had risen as a consequence of the pandemic, while manufacturers also warned that it will be a long road back to pre-pandemic levels of production. Employment numbers also continued to fall sharply, despite a solid rise in new orders. Cable has been trending higher for about three weeks, though recent daily price action has been jagged and upside momentum has been waning, with the pound having been weakening against other currencies on signs, and confirmation at a press conference yesterday, that the UK and EU remain deadlocked on key issues in trade talks. The latest round of UK-EU trade talks ended yesterday without breakthrough. With a the possibility of the UK exiting the single market without a new trade deal hanging in the air, the pound's upside potential is likely to remain muted.

    [USD, CHF]
    EUR-CHF has recently lifted from levels near 1.0600 to levels above 1.0750, benefiting from broader euro gains as markets anticipated EU leaders green-lighting 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 lifted to within a pip of its peak from yesterday, at 1.3428. Oil prices have remained heavy after yesterday sinking to three-day lows. The Canadian dollar will likely remain hostage to fluctuations in oil prices. Concerns about the impact of localized lockdown measures in the U.S. and the marked deterioration in U.S. and Western relations with China are currently weighing on oil prices and other asset markets. This has offset this week's green-lighting of the 750 bln euro EU recovery fund, and the continued the progress the U.S. Congress is making on a fresh fiscal package (that is looking likely to be reached in the first week of August), which is likely to amount to between $1 tln and $1.5 tln. Australia and other nations have also, or are working on, new fiscal support measures, aimed in part to replace "first wave" support responses to the pandemic. Positive trial results in several of the leading coronavirus vaccine candidates have also been in play. 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, along with geopolitical tensions.

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