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By XE Market Analysis September 2, 2020 8:17 am
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    XE Market Analysis: North America - Sep 02, 2020

    The dollar built on the rebound that commenced from yesterday's trend lows, when above-forecast U.S. economic data and fresh record highs on Wall Street prompted some profit taking on short positions. The narrow trade-weighted USD index (DXY) posted a five-day high at 92.68. EUR-USD concurrently posted a five-day low at 1.1852, extending the correction from yesterday's 28-month high at 1.2012. The drop has been concomitant with the 10-year Bund yield falling 3.0 bp juxtaposed to a 1.2 bp rise in the 10-year U.S. T-note yield. This came with market participants anticipating a dovish ECB announcement at next week's policy meeting. The ECB is considering following the Fed by strengthening the "lower for longer" message with a shift to a more symmetric inflation target as part of its framework review. Although predictable, it provides an offset to the bullish EUR-USD narrative. Another factor that is entering market participants' collective consciousness is ongoing signs of a total impasse in trade negotiations between the EU and UK, which is serving as a check on the upside of both EUR-USD and Cable. This comes with the deadline for reaching agreement before the UK leaves the EU's single market, October's EU leaders' summit, drawing close. The UK government is also understood (via press leaks) that it is planning to raise taxes, and this with the UK pandemic wage support scheme expiring next month. Cable posted a two-day low at 1.3326. Elsewhere, USD-JPY lifted to a five-day high at 106.23 in a tentative break from a narrow orbit of the 106.00 level, a level which roughly markets the midway point of the range that's been seen over the last month. EUR-CHF settled lower after spiking sharply yesterday, which produced a three-month peak at 1.1882. USD-CAD lifted towards the 1.3100 level, extending the rebound from yesterday's eight-month low at 1.2992. A firmer U.S. currency and stable oil prices have given the pair buoyancy.

    [EUR, USD]
    The euro is softer against most currencies today, ranging between a 0.2% and 0.4% decline versus the dollar, euro, yen, pound, Canadian dollar and Swiss franc, as of the early European afternoon. The common currency is near net unchanged in the case against the Australian dollar. EUR-USD has posted a five-day low at 1.1852, extending the now quite sharp correction from yesterday's 28-month high at 1.2012. The drop has been concomitant with the 10-year Bund yield falling 3.0 bp juxtaposed to a 1.2 bp rise in the 10-year U.S. T-note yield. Market participants are anticipating a dovish ECB announcement at next week's regular policy meeting. The ECB is considering following the Fed by strengthening the "lower for longer" message with a shift to a more symmetric inflation target as part of its framework review. Although predictable, it provides an offset to the bullish EUR-USD narrative. Another factor that's in participants' consciousness are ongoing signs of a total impasse in trade negotiations between the EU and UK, which may be serving as a check on the upside of both EUR-USD and Cable. This comes with the deadline for reaching agreement before the UK leaves the EU's single market, October's EU leaders' summit, draws close. The UK government is also understood (via press leaks) that it is planning to raise taxes, and with the UK pandemic wage support scheme expiring next month. All this comes with the S&P 500 and Nasdaq continuing their record-breaking and peer-outperforming streak on Wall Street.

    [USD, JPY]
    USD-JPY has lifted to a five-day high at 106.23 in a tentative break from a narrow orbit of the 106.00 level, a level which roughly markets the midway point of the range that's been seen over the last month. A firmer dollar environment has lifted the pair. The yen, meanwhile, has rebounded some of its recently lost ground to most of the the other developed-world currencies. Most yen crosses have been trending higher since May, with the Japanese currency tracking inversely with global stock market direction. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. 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 a profile of being a low-beta haven currency. With risk appetite among market participants high, fuelled by massive monetary and fiscal stimulus efforts worldwide, the yen has been trending lower (ex USD-JPY). This looks likely to remain the case for now.

    [GBP, USD]
    Sterling is softer today. Cable dropped back under 1.3350, down from the eight-and-a-half month high that was printed yesterday at 1.3484. This left December's 1.3516 peak unchallenged. A rise above this level would put the pair in 28-month terrain. The pound is now showing year-to-date gains on the dollar, though remains net lower versus most other peer currencies over this period; more than 5% lower in the case against the euro (which is a proxy of the pound's broad trade-weighted value). A fractional revision lower in the UK's August manufacturing PMI headline figure had little impact. The survey highlighted areas of concern, however; a rapid depletion in the work backlog that was built up as a consequence of the lockdown points to spare capacity, which along with dropping employment levels is an ominous sign heading into the expiry of the government's wage support scheme in October. The service sector will be even more exposed to the ending of wage support, with aviation, high street retail and the hospitality sectors particularly vulnerable. There is pressure on the government to extend. Germany extended its furlough scheme by two years. Without an extension, the UK's recovery, which mostly exceeded expectations over July and August, is likely to slow in the months ahead, which in turn would rekindle speculation of the BoE taking interest rates negative. Another risk facing the pound are possible tax hikes, with the government leaking to the press over the weekend ideas for raising them. Then there is Brexit. The latest press reports, which include unnamed source input, tell of a total impasse in negotiations. Leaving the EU's single market at year-end without a replacement deal, when taxes rising, would be a powerful downward driver of the pound. Note that when UK leaves the single market, it will not just be leaving free trade with the EU but also the 40 free trade deals the EU has across the globe. UK trade would switch to WTO rules until such time new trade deals have been made, which will take years.

    [USD, CHF]
    EUR-CHF spiked sharply yesterday, which produced a three-month peak at 1.1882. The rally was concomitant with EUR-USD soaring into 28-month high territory above 1.2000. Robust manufacturing data from most key global economies, and global stock market gains may have also helped weaken the low beta, safe haven Swiss franc. The influence of the SNB's intervening hand may have been at play during the recent upside bursts. Total Swiss sight deposits of francs have risen by over 130 bln since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. 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, and which should help the SNB combat what it sees as a chronically overvalued franc. EUR-CHF still remains below the seven-month peak that was seen in early June at 1.0921. One downside risk for EUR-CHF is the Brexit endgame, which is fast approaching. The latest reports suggest the EU and UK are in a total impasse just one month before a deal has to be struck before the UK leaves the EU's single market at year-end. The risk is that the two sides will reach only a bare bones deal, or even no deal at all. The prospect for this would be de-stabilising for both the pound and euro, and would likely underpin the franc.

    [USD, CAD]
    USD-CAD has found a footing after pegging an eight-month low at 1.2992 yesterday. A rebound in the U.S. currency has been at play. Strong August manufacturing data out of the U.S., along with Wall Street's continued record-breaking streak, have challenged the U.S. currency's bear trend, although bearish sentiment remains strong. Oil prices have continued to trade neutrally, holding below the six-month highs that were printed last week. Hurricane Laura wasn't as disruptive to Gulf of Mexico crude production as feared. The pair only needs to fall below last December's nadir at 1.2949 to put it in 23-month low territory. We advise trend following. Prospects for continued global economic recovery from lockdowns look good, which in turn would be supportive of oil prices and the Canadian dollar. The daily rate of new coronavirus cases in the U.S. is trending down, and -- much more importantly -- is the incidence of severe/critical illness and deaths. In Europe, the "casedemic" continues in most countries but remains unaccompanied by an actual public health event (severe illness and deaths). Sweden -- where there has been no lockdown and no facemask mandate -- continues to be shining light, with new cases now dropping to very low levels, while severe illness and death rates have been bumping along at low levels, trending to near zero, for months. The point being, the pandemic in major economic regions is no longer really a pandemic, although a 'casedemic'/'feardemic' persists. False positives in the PCR tests used for the SARS Cov-2 coronavirus are a known problem, and could be greatly exacerbating the casedemic.

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