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By XE Market Analysis September 4, 2020 7:20 am
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    XE Market Analysis: North America - Sep 04, 2020

    Narrow ranges have been prevailing ahead of the U.S. August payrolls report. Markets are also trading cautiously into next Thursday's ECB meeting, with some of the more dovish governing council members having this week expressed their concern about the appreciating trend of EUR-USD. The common currency has been settled in a narrow range in the mid 1.1800s after yesterday lifting on dollar weakness from the eight-day low at 1.1789. The narrow trade-weighted USD index (DXY) managed to scratch out a new one-week low, at 92.66, surpassing yesterday's low by 3 ticks. The dollar's price action over the last day, with Wall Street correcting sharply, shows that market participants aren't looking at the dollar as a safe haven, as they had been earlier in the year. The bearish dollar sentiment is hinged on the Fed's adoption of average inflation targeting, which has seen the Treasury yield advantage relative to peers erode since Chairman Powell announced it last Thursday. One unnamed ECB member cited by the FT noted the Fed has already made the regime shift while the ECB is amid its strategy review, which isn't expected to be completed until next year. The FT also quotes one of their ECB sources saying, "the market may interpret interest rates as being structurally higher in the euro area, which could lead to further appreciation of the euro." ECB hawk, Wunsch, meanwhile, said today that dovish expectations for next Thursday's meeting risk overshooting. EUR-USD is likely to see two-way trade for now, though we think there is a risk for an upward pop in the dollar at today's jobs report. We forecast August non-farm payrolls to rise 1.800 mln, versus the previous 1.763 mln increase and above the median forecast is for a 1.395k rise.

    [EUR, USD]
    EUR-USD has settled in a narrow range in the mid 1.1800s after yesterday lifting on dollar weakness from the eight-day low at 1.1789. The dollar decline showed that the market is not looking upon it as a safe haven, as it was earlier in the year, given the concomitant sharp correction on Wall Street yesterday. There remains a strong bearish dollar sentiment, hinged on the Fed's adoption of average inflation targeting, which has seen the Treasury yield advantage relative to peers erode since Chairman Powell announced it last Thursday. The ECB's voiced concerns about the appreciation in EUR-USD, via its chief economist and a number of unnamed council members in an FT article, catalysed a correction from 28-month highs above 1.2000. But, as one ECB member cited by the FT noted, the Fed has already made the regime shift while the ECB is amid its strategy review, which isn't expected to be completed until next year. The FT quotes the member as saying, "the market may interpret interest rates as being structurally higher in the euro area, which could lead to further appreciation of the euro." The article highlights the thinking among at least some members at the ECB, who are viewing the recent 10%-plus rise in the euro versus the dollar as worrisome given weak demand levels in the Eurozone economy, which raises the importance of global trade. Market participants are likely to tread cautiously into next week's ECB council meeting, which should keep EUR-USD a two-way trade for now. Another big focus is today's U.S. August payrolls report. We expect non-farm payrolls to rise 1.800 mln, versus the previous 1.763 mln increase. The median forecast is for a 1.395k rise, so we seen scope for a upside pop in the dollar.

    [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 settled today after seeing a bout of underperformance yesterday. Cable yesterday hit a one-week low at 1.3242 before finding a footing, and presently plying a narrow range near 1.3300. Market participants have become increasingly sensitive to an accumulation of negatives and risks with regard to the UK economic outlook. BoE policy voter Vlieghe said on Wednesday that there is a "material risk" that it could take several years before the economy to return to full capacity following the lockdown shock. Final services and composite August PMI data out of the UK were revised lower, and while the headlines remained at multi-year highs, the rebound activity has in part been fuelled by the working through of lockdown-caused work backlogs, which are in process of being completed. The construction PMI painted a similar picture, with lack of new work to replace completed contracts causing a marked deceleration in the pace of expansion. The PMI surveys also highlighted an acceleration in job shedding in both the manufacturing and service sectors in August, while the rate of job losses in the construction sector remained near decade highs. The labour market was impacted by the partial unwinding of the government's wage support scheme last month. The program is due to fully expire next month, and unless it is extended there is risk of a significant wave of job losses in areas such as aviation, high street retail and hospitality. Then there is the possibility of tax hikes (government plans were leaked to the press) and the risk of a bare-bones deal or no-deal outcome in the Brexit endgame. More encouraging has been the strong rebound in consumer spending, though business investment remains low.

    [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 settled lower after pegging an eight-day high at 1.3163 yesterday. A rotation lower in the U.S. currency was at play, offsetting the sharp drop in oil prices. Front-month WTI crude futures printed a one-month low at $40.23. Oil prices have seen lifted moderately, though WTI benchmark prices remain nearly 4% down on week-ago levels. Canada's calendar brings the August employment report today, which will be released alongside the U.S. jobs report. We expect 350.0k rise in Canadian 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. Bigger picture, assuming that the global economy continues to recovery, we anticipate USD-CAD to remain downwardly biased.

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