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By XE Market Analysis September 3, 2020 7:18 am
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    XE Market Analysis: North America - Sep 03, 2020

    The dollar is up for a third straight day as measured by the narrow trade-weighted DXY index, which posted a six-day high at 93.06, which further extended the rebound from Tuesday's 28-month low at 91.75. EUR-USD concurrently posted a one-week low at 1.1789, before an unexpected upward revision in the final Eurozone services PMI headline for August, to 50.5 from the prelim 50.1 reading, helped stabilize the euro, despite a -1.3% m/m outcome in July Eurozone retail sales. The common currency has been underperforming as markets focus on a possible framework change at the ECB aimed at increasing inflation, which comes in light of the unexpected negative reading in August Eurozone CPI data (released Tuesday, at -0.2% y/y). Some ECB policymakers have also been hinting that EUR-USD gains may lead to more monetary accommodation. In other August PMI data today, China's Caixin services PMI was revised a tick lower, to 54.0, though the composite PMI was revised higher, to 55.1 from 54.5. The UK's August services and composite headlines were revised lower, the latter to 59.1 from 60.3, and while still marking the best level since August 2014, the PMI surveys revealed space capacity and an accelerating pace of job losses as a consequence of tapering pandemic-era government support schemes. Sterling came under pressure; Cable printed a six-day low at 1.3251 while EUR-GBP rallied back above 0.8900 after earlier posting a three-month low at 0.8866. Elsewhere, the firmer dollar drove AUD-USD to a six-day low at 0.7291, while lifting USD-CAD and USD-JPY to respective three- and six-day highs at 1.3102 and 106.48. Global stock markets have remain buoyant, overall. Front-month WTI oil futures printed a four-week low at $40.64 low, extending the correction from last week's four-week low at $43.78.

    [EUR, USD]
    EUR-USD has settled in the lower 1.1800s after recouping from the one-week low that was pegged in early London trading at 1.1789. An unexpected upward revision in the final Eurozone services PMI headline for August, to 50.5 from the prelim 50.1 reading, helped stabilize the euro, despite an -1.3% m/m outcome in July Eurozone retail sales. A profit taking impulse on dollar short positions was initially seen following the breach above 1.2000 earlier in the week, which came as market attention on the ECB's framework review rose following the unexpected negative August CPI figure out of the Eurozone (of -0.2% y/y). Like the Fed, the European central bank is considering shifting to an average inflation targetting regime. In the mix has been remarks by ECB policymaker, warning that the recent appreciation of the EUR-USD could increase pressure for more monetary accommodation. Chief Economist Lane, on Tuesday evening, for instance, said that while the ECB doesn't explicitly target the exchange rate, "it will be important to recognise that the euro-dollar rate is also endogenous to monetary policy." Although this states the obvious, following a 10%-plus rally in EUR-USD, Lane's remarks sounded a little like verbal intervention, similar to the RBA is apt to do about the Aussie dollar on occasion (the RBA already pursues average inflation targetting). Next week's ECB Governing Board policy meeting will be a big focus for markets. After decline over the last couple of days, the euro is at near net unchanged levels versus the dollar from week-ago levels, and is down against most of its other developed-world currency peers.

    [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]
    The pound has seen mixed trading in the wake of the final August PMI data out of the UK. Market participants were seemingly not too perturbed by the downward revisions in the UK's headline services and composite PMI readings, nor the acceleration in job shedding in both the manufacturing and service sectors in August. Cable was showing a 0.4% decline on the day, as of the late morning in London, which reflects the impact of an earlier advance in the dollar. The pair's six-day low at 1.3277 has remained unchallenged in the wake of the PMI data. EUR-GBP was up by about 20 pips on the three-month low that was seen earlier, at 0.8866. The common currency has been underperforming as markets focus on a possible framework change at the ECB aimed at increasing inflation, which comes in light of the unexpected negative reading in August Eurozone CPI data (of -0.2% y/y). Downside risks for the pound seem greater than upside risks. Job losses are continuing in the UK, with vulnerable areas of the labour market being impacted by the partial unwinding of the government's wage support scheme last month. The scheme is due to fully expire next month. The rebound in consumer lending, after four months of contraction, has been a particular positive in the circumstances, as it suggests demand conditions are improving, which may help the private sector weather the withdrawal of the furlough scheme. The pound faces other downside risks, including possible tax hikes and the risk of a bare-bones deal or no-deal outcome in the Brexit endgame.

    [USD, CHF]
    EUR-CHF once again failed to sustain gains above the 1.0800 level, returning to familiar levels in the mid 1.0700s. This is a pattern that has been repeating for about six weeks now. This week the cross spiked sharply, on Tuesday, to 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. 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 pegged to a three-day high at 1.3099, floated by a broadly firmer U.S. currency and an ebb in crude prices, which is a negative for oil-correlating currencies such as the Canadian dollar. Front-month WTI futures have printed a four-week low at $40.64 low, extending the correction from last week's four-week low at $43.78. Weekly data showing a drop in U.S. gasoline demand, along with upcoming closures of refining facilities in the U.S., which will temporarily weaken demand for crude, are being cited in oil market narratives. Canada's calendar brings the August employment report tomorrow. We expect 350.0k rise in jobs after the 418.5k gain in July, the record 952.9k surge in June, and the 289.6k increase in May. The recent employment gains, and the expected gain in August, will roughly recoup two thirds of the sizeable declines during the pandemic lockdown in March and April.

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