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By XE Market Analysis July 31, 2020 7:29 am
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    XE Market Analysis: North America - Jul 31, 2020

    The dollar pared intraday declines that were largely seen ahead of the London open. The narrow trade-weighted USD index printed a fresh 26-month low at 92.59, the culmination of a 5% decline from the finishing level in June and marking just over a 10% drop from the highs seen in early March, before lifting to a rebound high at 92.97. EUR-USD concurrently ebbed to the mid 1.1800s after pegging a 26-month high at 1.1908. Cable, AUD-USD, among other pairings, have seen a similar action. European stock markets and U.S. equity index futures posted moderate gains following a mostly negative session in Asia. A profit taking impulse has been observed in some market narratives heading into the weekend, with the rejection by top Republicans of President Trump's Tweet suggestion that the upcoming presidential election be delayed has also got some mention (with Congress having sole power to change the election date). There remains a lot of bearishness in the forex market about the dollar, however. Congress and the White House remain deadlocked over the next stimulus bill (the Senate has adjourned on the issue until Monday), and markets are likely to sensitive to how big the package will be. More than 30 million U.S. citizens will see there income drop by 50%-75% after today's expiry in the crisis unemployment benefits. Following the historic 32.9% y/y contraction in Q2 GDP, and with many states exercising lockdown measures, the pressure is on.

    [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 has lifted out of a five-month low as the dollar rebounds from its post-GDP losses, and with European stock markets and U.S. equity index futures posting moderate gains. USD-JPY has posted rebound high at 104.81, leaving a five-month low at 104.14. The yen is near net unchanged levels versus the euro and Australian dollar. Data out of Asia today were highlighted by encouraging July PMI survey data out of China, and an above-forecast 2.7% m/m rise in Japanese production. Japan's Okinawa prefecture is set to announce a state of emergency again, due to a spike in new coronavirus cases, according Fuji news, re-reported by other media. The more economically important Tokyo and Osaka prefectures remain open. The BoJ left is bond buying operations largely unchanged at a monthly review.

    [GBP, USD]
    Cable pinned a new five-month peak, at 1.3145. The pair is now firmly back in pre-lockdown territory. The UK currency 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 and improvement in the CBI's July distributive sales report, which flagged a near full recovery in the retail sector, 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, with a number of sourced press reports suggesting that discussions are going better than the official line suggests. 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 has been an exception to the U.S. dollar weakening theme, with the pairing consolidating after making a nine-day high at 1.3461 yesterday. The Canadian dollar has been affected by a the drop in oil prices over the last day. Front-month WTI crude futures hit a three-week low on Thursday at $38.72, and while since recouping to levels near $40.0, remain down by over 2.5% from week-ago levels. 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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