XE Market Analysis: North America - Jul 14, 2020

The dollar firmed moderately and then weakened moderately, while the pound underperformed and the euro outperformed. Asian and European stock markets declined, following Wall Street's negative close yesterday, while U.S. index futures lifted. S&P 500 futures were off the highs but showing a 0.3% gain as of the early afternoon in Europe. Unexpected strength in China's June import and export data (which rose by 2.7% y/y and 0.5% y/y, respectively, versus median forecasts for -10.0% and -1.5%) failed to have much impact on risk appetite, although providing some balance as some U.S. states roll back reopening measures in response to spikes in coronavirus infections. Simmering U.S.-China tensions, particularly the Trump administration's motions towards restricting Chinese firms from accessing U.S. capital markets, is also featuring in market commentaries. In forex markets, the euro has been outperforming, gaining most (0.5%) against the underperforming pound, which took a hit from a markedly below forecast UK May GDP outcome. EUR-GBP printed a two-week high at 0.9084, while EUR-USD lifted above 1.1360, drawing back in on the one-month high seen yesterday at 1.1375. EUR-JPY rose to within a few pips of four-week highs. Sub-forecast Eurozone production and German ZEW confidence survey data had little impact on the euro, with forex markets retaining high hopes that the proposed EUR 750 bln EU recovery fund will be green-lighted at this week's EU leaders' summit. Cable posted a one-week low at 1.2507 UK May GDP showed 1.8% m/m growth versus the median forecast for 5.5%, while the 2-year Gilt yield dipped below that of the 2-yeawr JGB for the first time ever. USD-CAD rallied to a two-week high at 1.3647, concomitantly with front-month WTI crude futures printing a four-day low at $39.19. USD-JPY maintained a narrow range, though still managed to eke out a five-day high at 107.36.

[EUR, USD]
The euro has been outperforming today, gaining most (0.5%) against the underperforming pound, which took a hit from a markedly below forecast UK May GDP outcome. EUR-GBP printed a two-week high at 0.9084, while EUR-USD lifted above 1.1360, drawing back in on the one-month high seen yesterday at 1.1375. EUR-JPY rose to within a few pips of four-week highs. Sub-forecast Eurozone production and German ZEW confidence survey data had little impact on the euro, with forex markets retaining high hopes that the proposed EUR 750 bln EU recovery fund will be green-lighted at this week's EU leaders' summit. The multiannual financial framework fund has been taken as a positive step in recent analyst commentaries, being a hinge factor of some recent bullish euro calls on the basis of it reducing eurozone breakup risk while creating a new liquid and higher-yielding AAA asset, which will attract inflows from real money investors and reserve managers. Euro bulls may be targetting EUR-USD's early March high at 1.1494. A downside risk for EUR-USD would be any rekindling in risk aversion in global markets, which would likely drive the pair lower on the back of safe haven demand for dollars.

[USD, JPY]
USD-JPY has so far today maintained a narrow range, although still managed to eke out a five-day high at 107.36. Most yen crosses remained within their respective Monday ranges. Shifting risk premia in global markets looks likely to remain a primary driver of direction for the Japanese currency. While the BoJ remains committed to uber stimulus, the central bank is no longer unique in this regard, 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 reliable reputation as a haven currency. Market participants are grappling with glass-half-empty and glass-half-full arguments. Strong incoming May and June economic data, as economies rebound from the April lockdown nadir, have become increasingly old news, especially amid signs of new waves of coronavirus infections as economies reopen, which has already seen social restrictions being re-introduced in some places. Geopolitical issues remain wildcards. On the glass "half full" side, there is the expectation that the massive stimulus by global central banks is primed to give risk assets a major boost, which in the event would likely see the Japanese currency underperform.

[GBP, USD]
The pound is underperforming for a second day, which has put Cable at a one-week low at 1.2507 and EUR-GBP at a 13-day peak at 0.9070. A much weaker than expected UK May GDP figure, which showed 1.8% m/m growth versus the median forecast for 5.5%, weighed on the pound. The independent Office for Budget Responsibility concurrently forecast UK GDP would shrink by 10% in 2020, putting paid to any lingering hopes for a V-shaped recovery, while the 2-year Gilt yield dipped below that of the 2-yeawr JGB for the first time ever. This confluence of bearish cues arrived with the UK currency trading at relatively lofty levels following two week phase of outperformance, and with signs that the UK and EU are unlikely to make anything but a narrow trade deal. The latest round of trade negotiations ended early last week for a second consecutive week due to "significant differences," as EU chief negotiator Barnier put it. There had been other reports last week suggesting that "landing zones" on difficult issues were coming into view, though there are also reports that the UK government is considering free ports and competitive tax cuts, which would rule out any chance of a broad trade deal being made with the EU. The UK government's extra GBP 30 bln for the fiscal pot, announced last week and which brought the total crisis-response fund to GBP 160 bln, was largely as expected, and is now priced in markets. The UK releases the BRC retail sales report and inflation data, both for June, tomorrow.

[USD, CHF]
EUR-CHF has fallen back in recent weeks, though has continued to trade comfortably above the series of lows near 1.0500 that were seen from March through to mid May. Committed SNB intervention prevented the 1.0500 level from being breached over this period, when the consequences of the pandemic increasing bets about a possible breakup of the euro area, and even the EU. However, since the Franco-German backed EU recovery fund gained traction in mid May, these bets have gone sour, which led to a rebound in EUR-CHF. Further out, the Swiss economy will likely be better able to recover from the pandemic era than the eurozone economy. Along with Swtizerland's massive current account surplus, these are factors that suggest upside potential for EUR-CHF will be limited, regardless of the SNB's desire for a weaker currency. Regarding the SNB, the central bank left policy settings unchanged at its recent quarterly review, reaffirming that aggressive intervention will remain the main tool to fight the impact of the coronavirus pandemic on the franc. SNB chief Jordan stressed that the currency remains "highly valued" and repeated that the central bank will continue to sell it as needed. The SNB is now forecasting a contraction in economic activity of 6% this year, the most severe recession since the 1970. The SNB also trimmed inflation forecasts, though it is pretty clear that policymakers are reluctant to go below the current level of -0.75% for the key policy rate. Negative for longer remains Swiss policymakers' central policy guidance.

[USD, CAD]
USD-CAD has rallied to a two-week high at 1.3647, concomitantly with front-month WTI crude futures printing a four-day low at $39.19. We are taking a neutral-to-bearish view on oil prices, and by correlative association the Canadian dollar. Global demand looks to be flattening out following the sharp recovery from the April lockdown nadir, while there is a chance supply might increase. The OPEC+ group have been maintaining pandemic-era supply quotas, though will reportedly be considering increasing them at its meeting this week. Any increase in supply from the group would likely offset, or more than offset, the drop in U.S. production, which has been stricken by viability issues (with costly U.S. shale operations needing prices to be at $50-$55 for break-even).