XE Market Analysis: North America - Jul 16, 2020

The dollar rallied to a two-day high in narrow trade-weighted terms, with the DXY index pegging a high at 96.32, extending the rebound from yesterday's five-week low at 95.78. The rotation higher in the U.S. currency has been driven by a bout of risk aversion in global stock markets, which raised safe-haven demand for dollars. News that the Trump administration is considering a ban on members of the Chinese Communist Party and their families from entering the U.S., which would mark a significant further deterioration in U.S.-Sino relations, sparked risk-off positioning. An earlier report that human trials in Oxford University's candidate vaccine have been positive had little impact markets, with a leak of this yesterday having already familiarized markets. In the mix have been nagging concerns about a second wave of coronavirus infections, with Tokyo, for instance, reporting a another daily record in new cases. Data today have included Chinese June production, which met expectations with growth of 4.8% y/y, and a 1.8% y/y contraction in Chinese June retail sales, which thwarted expectations for 0.5% growth. Australian June employment rose 210.8k, more than double the consensus forecast, though the jobless rate edged up to 7.4% from 7.3%. UK June labour data showed a partial rebound following the significant lockdown contraction. The ECB will be announcing on policy shortly, where no change is widely expected, along with a reaffirmation of dovish bias. Among currencies, dollar firmness weighed on EUR-USD, which tipped under 1.1400 after yesterday posting a three-and-a-half-month high at 1.1452. Cable printed a two-day low at 1.2536. USD-JPY saw little direction, holding in a narrow range near 107.00, above the six-day low seen yesterday at 106.66. AUD-USD ebbed back under 0.7000, leaving yesterday's five-week high at 0.7039. The risk-sensitive AUD-JPY cross edged out a two-day low. USD-CAD lifted out a one-week low at 1.3500. Front-month WTI crude prices corrected under $41.0 after yesterday pegging a three-week high at $41.26.

[EUR, USD]
EUR-USD posted a new trend high at 1.1445, the highest level seen since the early March high at 1.1494. The pair has been floated by a combo of broader dollar softness, which has come amid a risk-on backdrop, and by the recent broad underpinning the euro has seen amid expectations for EU leaders to green-light the proposed EUR 750 bln recovery fund this week. The coronavirus pandemic currently looks a lot more under control in Europe than in the U.S., where spikes in infections across 41 states is currently ensuing. As for the EU's recovery fund, the proposed 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. 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]
The yen has recouped earlier losses, nudging USD-JPY below 107.00. A broadly softer dollar has been influencing, though some yen crosses have also dipped, with the risk-sensitive AUD-JPY, for instance, ebbing under 75.00 after earlier printing a one-week high at 75.29. The BoJ left policy unchanged following its policy review today, as had been widely anticipated. Governor Kuroda maintained dovish guidance, noting that there remain various tools that could be utilized for further easing. Assuming the risk-on backdrop persists, we wouldn't expect yen gains to sustain, although it must be said that markets are fickle and apt to turn quickly from risk takers to risk avoiders. 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.

[GBP, USD]
Sterling is back under pressure after rallying yesterday. Cable printed a two-day low at 1.2536, while EUR-GBP has edged out a two-day high at 0.9093, drawing in on Tuesday's 16-day high at 0.9116. GBP-JPY has also approached the 10-day low that was seen earlier in the week. UK June labour data showed a partial rebound following the significant lockdown contraction; not a startling revelation to markets. From here, we anticipate only limited upside potential for the pound, given the risk that trade discussions between the UK and EU continue without breakthrough. Officials have continued to report that they remain deadlocked over key issues. While there have been reports of "landing zones" on difficult issues coming into view, there have also been reports that the UK government is planning free ports and competitive tax cuts, which would rule out any chance of a broad trade deal being made with the EU. Negotiations are continuing in Brussels, and are scheduled to continue through to the end of the month before resuming on August 17th after the summer break. October is being touted as the deadline, with the UK scheduled to leave the EU's single market at year end.

[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 lifted out a one-week low at 1.3500 as a risk-off positioning phase lent support to the pairing. Front-month WTI crude prices corrected under $41.0 after yesterday pegging a three-week high at $41.26.We don't anticipate too much upside potential in oil prices, and by association the Canadian dollar. The OPEC+ group look to be headed for a easing in output quotas at the end of July, while significant parts of the U.S., and other localities around the world, are re-introducing lockdown measures in response to spikes in coronavirus infections. The continued deterioration in U.S-China relations also remains a concern.