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By XE Market Analysis July 27, 2020 7:23 am
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    XE Market Analysis: North America - Jul 27, 2020

    The dollar continued to decline, printing fresh trend highs against the euro and other currencies. The narrow trade-weighted USD index (DXY) fell over 0.5% to a 22-month low at 93.76 in what is now the seventh consecutive day of decline and the fourth straight week the index has surpassed its prior-week low. Momentum has also been accelerating to the downside over the last week. EUR-USD concurrently printed its loftiest level seen since January 2018 at 1.1731. USD-JPY fell by 0.8% in pegging a four-month low at 105.25. AUD-USD and NZD-USD lifted by around 0.5% a piece, though both pairs remained off recent trend highs. USD-CAD ebbed moderately, drawing in on last Thursday's seven-week low at 1.3349. Front-month WTI crude prices are softer, but have so far remained within the range seen on Friday. Cable posted a near five-month peak at 1.2875, despite losing ground to the euro, yen and Australian dollar, among other currencies. The pound's laggard performance comes amid increasing signs that the EU and UK are only likely to strike a narrow trade deal, with the risk remaining that the UK might even leave the single market at year-end without a deal. As for the dollar, the currency appears to be amid a down-weighting phase in portfolios on the advent of the EU's recovery fund, seen as a milestone by many analysts (a new liquid AAA fund that also reduces Eurozone breakup risks), along with expectations for dovish guidance from the Fed at this week's FOMC. There has been some speculation that the U.S. central bank is considering yield curve targetting (which we don't anticipate anytime soon). Global stock markets continue to exhibit a flagging price action, being richly valued and as the pace of global economic recovery is flattening out somewhat, along with U.S.-China tensions rising from simmering to bubbling. Gold prices hit new highs above $1,900, reflecting investor concerns that the massive stimulus measures around the world will lead to an inflation spike.

    [EUR, USD]
    EUR-USD has printed its loftiest level seen since January 2018 at 1.1724, which was seen ahead of the London open today. The pair has since remained buoyant, near the 1.1700 mark. The new high was largely a reflection of broad dollar weakness, with most euro crosses putting in a steady performance. The narrow trade-weighted USD index (DXY) fell over 0.5% to a 22-month low at 93.84 in what is now the seventh consecutive day of decline and the fourth straight week the index has surpassed its prior week low. Momentum has also been accelerating to the downside over the last week, concomitant with accelerating upside momentum in EUR-USD. The U.S. currency appears to be undergoing a down-weighting in portfolios on the advent of the EU's recovery fund, seen as a milestone by many analysts (a new liquid AAA fund that also reduces Eurozone breakup risks). There are also expectations for dovish guidance from the Fed at this week's FOMC, including some speculation that the U.S. central bank is considering yield curve targetting, although we don't anticipate this anytime soon. A Reuters survey last week 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. Downside risks for EUR-USD include less dovish than expected Fed guidance this week, and any sustained rekindling in risk aversion in global markets, which would likely generate safe haven demand for dollars.

    [USD, JPY]
    USD-JPY fell by over 0.6% in pegging a four-month low at 105.39. Yen crosses have so far been comparatively steady, with the USD-JPY decline having been driven by a broad rotation low in the dollar. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. 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 recently 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 reputation as a reliable haven currency.

    [GBP, USD]
    The pound has been trading mixed so far today, posting a near five-month high at 1.2858 against the underperforming dollar, but losing about 0.3% against the euro, yen and Australian dollar, among other currencies. The UK currency's laggard performance comes amid increasing signs that the EU and UK are only likely to strike a narrow trade deal, with the risk remaining that the UK might even leave the single market at year-end without a deal. The final round of EU-UK trade talks before the summer break will take place this week in London. Last week's round in Brussels ended without breakthrough, with both sides reporting that major differences remain on key issues, particularly level playing field rules and fisheries -- hardly a surprise to anyone keeping tabs on this issue. Each side has been doubling down in accusing the other of not being amenable to compromise. The deadline for reaching a deal before the UK leaves the single market at year-end is October (to allow time for political ratifications and a myriad of technical issues to be completed), and things aren't likely to get interesting until then. More posturing can be expected in the meantime. The UK calendar this week is relatively quiet, highlighted by latest CBI distributive sales report (Tuesday), June lending and money support figures from the BoE (Wednesday), and the July GFK consumer sentiment survey (Friday). The data should show a continued pick-up in activity as reopening broadens. There has been a mini boom in the residential housing market, as pent-up demand is unleashed with reopening, which should be reflected by a jump in mortgage lending in the BoE data.

    [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 is moderately today, drawing in on last Thursday's seven-week low at 1.3349. Front-month WTI crude prices are softer, but have so far remained within the range seen on Friday. 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 capping oil prices and other asset markets. This has offset global stimulus in terms of sentiment and positive trial results in several of the leading coronavirus vaccine candidates. Downside risks for the Canadian dollar include the OPEC+ group's course to easing output quotas, which could weigh on oil prices, alongside the coronavirus pandemic and geopolitical tensions.

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