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By XE Market Analysis July 30, 2020 7:28 am
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    XE Market Analysis: North America - Jul 30, 2020

    The dollar has managed a rebound from post-Fed lows, with the narrow trade-weighted USD index lifting above 93.50 after pinning a fresh 25-month low at 93.18. Speculative participants had built up a large net short dollar position going in to the FOMC, and a consequential profit taking motive has helped fuel the dollar's bounce after Fed Chairman Powell's expectedly signalled a continued commitment to ultra-accommodative policy. Stock markets sagged in Europe as focus shifted to a flood of incoming corporate earnings reports and political wrangling in the U.S. over the new coronavirus fiscal relief package, with President Trump having stated yesterday that the White House and Democrats were still far apart on the issue. The pressure is on as the $600 per week pandemic unemployment benefit expires tomorrow. USD-JPY ebbed to the 105.00 level after printing a post-Fed rebound high at 105.30. EUR-USD droped to the mid 1.1700s after printing a new 22-month peak at 1.1805 yesterday. The commodity currencies stand out for underperforming today. Both AUD-USD and NZD-USD have racked up declines of over 0.6%, with the former pegging a two-day low at 0.7128 after peaking at a 15-month high at 0.7196 in the wake of the Fed announcement. USD-CAD lifted by 0.6% in posting a two-day high at 1.3426. Front-month WTI crude futures fell by over 1.5% during the London morning, printing a three-day low at $40.60. S&P 500 futures were showing a decline of 0.9%. Gold prices retreated after making a fresh nominal record high yesterday at $1,974.90.

    [EUR, USD]
    EUR-USD has ebbed back to the mid 1.1700s after yesterday printing a new 22-month peak at 1.1805. The dip reflects a rebound in the dollar from yesterday's post-Fed announcement lows, with the narrow trade-weighted USD index lifting above 93.50 after pinning a fresh 25-month low at 93.18. Fed Chairman Powell gave an unambiguously strong commitment to continued ultra-accommodative policy ("not even thinking about thinking about thinking raising rates"), though there were no changes in terms of the 0%-0.25% rate band, QE, or hints on forward guidance, which left speculative participants in profit taking mood after building up substantial short positions into the Fed's policy review. Focus in the U.S. now switches to the final phase of political wrangling over the next fiscal package. Concerns about the impact of localized lockdown measures, particularly in the U.S., also remain. In Europe, localized bumps in new cases and led to some new travel restrictions, though the reopening process remains largely intact. We retain a bullish stance on EUR-USD, anticipating a visit of the 1.2000 level.

    [USD, JPY]
    USD-JPY recouped to a two-day high at 105.29 after printing a five-month low at 104.76 in the wake of the Fed announcement yesterday, which saw Chair Powell give a strong commitment to continued ultra-accommodative policy. The low was seen as the dollar dropped across-the-board, while the recovery today was seen in Asia before petering out as stock markets in Europe came under pressure, which in turn catalyst a rebound in the yen. The yen remains among the currency outperformers this week, alongside the euro and pound. The Japanese currency 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]
    Cable found a footing feet after sinking under 1.2950. The pair yesterday peaked at 1.3013, the loftiest level seen since the pre-lockdown days of early March. Sterling has been in the outperforming lane over the last couple of days, though still registers as the weakest of the main currencies on the year-to-date, and by some distance in trade-weighted terms, while recent dollar underperformance has been somewhat flattering the pound. Nevertheless, there are some convincing bullish arguments in market narratives. One is the pick-up in the pace of economic recovery in the UK, as evidenced by the much stronger than forecast preliminary July PMI data (outperforming Eurozone PMIs and showing the private sector to be back in expansion for the first time since lockdown) and the CBI's July distributive sales report, which flagged a near full recovery in the retail sector (by rising to a +4 headline, up from -37 in June and the best reading since April last year, with sales in upcoming months seen at near seasonal norms). There has also been signs that have led markets to factor improved odds for a EU-UK trade deal. An FT article this week asserted that the EU is willing to drop its demand that the UK accepts EU state-aid rules and oversight of the ECJ (European Court of Justice), and that "while further work is needed, a middle ground is clearly emerging". This followed a Reuters report earlier in the week that EU trade negotiator Barnier believes UK PM Johnson wants a deal, despite the UK government's often repeated assertion that it's willing to take the UK out of the single market at year-end without a new trade deal if it doesn't get what it wants. We see scope for Cable returning to levels around the 1.3500 mark.

    [USD, CHF]
    The Swiss franc has steadied at firmer levels after dropping quite sharply against the euro on Monday, which reflected broad outperformance of the common currency and, possibly, the added influence of the SNB's intervening hand. Weekly sight deposit figures out of Switzerland have been suggesting that the central bank has been continuing to sell francs regularly, as it has been since the consequences of the pandemic took a grip on markets, which had the impact of increasing demand for the Swiss currency. A rise in sight deposits (money held by commercial banks) can suggest francs turning up after being sold by the central bank. EUR-CHF made a rare appearance on the 'biggest daily mover' list out of the main dollar pairings and associated cross rates on Monday, rising by over 1% at intraday highs. A seven-week high was pegged at 1.0841. The seven-month peak, seen in early June, is at 1.0921. 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) has by many accounts caused a re-weighting of the common currency in portfolios.

    [USD, CAD]
    USD-CAD lifted by over 0.6% in posting a three-day high at 1.3426, recouping from the seven-week lows seen earlier in the week. Profit taking of U.S. dollar shorts, built up into the Fed's policy review this week, has been the theme, while oil prices have ebbed, too, which is imparting some pressure on the Canadian dollar and other oil correlating currencies. Front-month WTI crude futures fell by over 1.5% during the London morning, printing a three-day low at $40.60. The Canadian dollar will likely remain hostage to fluctuations to the U.S. dollar and oil prices. 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, should they derail global asset markets.

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