XE Market Analysis: North America - Aug 17, 2020

The narrow trade-weighted USD index edged out a 10-day low at 92.89. EUR-USD correspondingly whittled out a 10-day peak at 1.1869, while Cable traded firmer from Friday's closing level, but remained comfortably shy of Friday's high at 1.3144. USD-JPY ebbed to a six-day low at 106.22. AUD-USD lifted to a 10-day peak at 0.7196. The Kiwi dollar underperformed the Aussie buck on news that the upcoming New Zealand general election is being delayed from September to October. Both Australia and New Zealand are in the grip of a rise in the infection rate curve of the coronavirus, reflecting the fact that community immunity has built up in those nations and with winter conditions, and the associated weakening of immune systems in the populace, exposing vulnerable groups. USD-CAD gave back more than three quarters of the gains seen on Friday in making an intraday low at 1.3222. Oil prices remained buoyant, although in a narrow range and off recent highs. Gold prices continued to consolidate the sharp losses from recent record nominal highs, holding below $2,000. The softer dollar hypothesis seems to still be in play in markets (negative Treasury yields, the more recent impact of the pandemic in the U.S. relative to Europe and other parts of the world, the political stalemate over the new pandemic relief package, risks presented by U.S.-China tensions, etc), although seemingly weaker than seen during July, which is reflected by abating momentum in the dollar's near five-month down trend. Incoming U.S. data have been showing continued economic recovery alongside an up-tick in inflation, while the coronavirus curves of ICU admissions and mortalities are now dropping sharply, although the "case-demic" (caused by unprecedented levels of testing for a respiratory illness) and an associated "fear-demic" can be expected to continue (and with a political edge into the November presidential election). Preliminary Q2 GDP data out of Japan today confirmed the worse contracted on record, of -27.8% y/y. In China, the PBoC added 700 billion yuan of one year funding, which drove an outperformance in Chinese stock indices today. In Europe, there are a number of new travel restrictions and quarantine measures.

[EUR, USD]
EUR-USD whittled out a 10-day peak at 1.1869 on the back of dollar softness. The narrow trade-weighted USD index concurrently edged out a 10-day low at 92.89. The softer dollar hypothesis seems to still be in play in markets (negative Treasury yields, the more recent impact of the pandemic in the U.S. relative to Europe and other parts of the world, the political stalemate over the new pandemic relief package, risks presented by U.S.-China tensions, etc), although seemingly weaker than seen during July, which is reflected by abating momentum in the dollar's near five-month down trend. Incoming U.S. data have been showing continued economic recovery alongside an up-tick in inflation, while the coronavirus curves of ICU admissions and mortalities are now dropping sharply, although the "case-demic" and "fear-demic" can be expected to continue (and with a political edge into the November presidential election). The advent of the 750 bln euro recovery fund and the fact that Europe has come through the pandemic ahead of the U.S. has been an underpinning factor of EUR-USD, along with the perception that the Fed is strategically being less attentive to inflation risks, which pushed real Treasury yields deep into negative territory. This dynamic looks to be shifting in certain aspects, which already seems to be curtailing EUR-USD's uptrend.

[USD, JPY]
USD-JPY has ebbed under Friday's low to a six-day trough at 106.32. The yen is also slightly firmer against the euro and Australian dollar, and more especially the Kiwi dollar, which has underperformed following news that the upcoming general election in New Zealand is being delayed by a month due to an upswing in coronavirus cases (which, for what it's worth, fits the annual pattern of flu and coronavirus outbreaks, with winter conditions in the northern and southern hemisphere marking the peak in public health impacts). Preliminary Q2 GDP data out of Japan today confirmed the worse contracted on record, of -27.8% y/y. This was fractionally worse than the median forecast, though caused little stirring in markets. The Japanese currency has been underperforming in recent weeks, with EUR-JPY, for instance, last week posting a 16-month high, and with AUD-JPY remaining buoyant since printing a 15-month peak last month. The yen likely to remain apt to directional change on the back of shifting risk premia in global markets. 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 a reputation as a reliable haven currency. With global asset markets having been buoyant of late, the yen has been on a underperforming path versus most currencies.

[GBP, USD]
Cable has traded firmer from Friday's closing level but has remained comfortably shy of Friday's high at 1.3144. The intraday high so far is 1.3122. The pound has been performing less robustly versus the euro and most other currencies (the case against the underperforming New Zealand dollar being a notably exception), with EUR-GBP having edged out an 18-day peak at 0.9061. Indications that the EU and UK will reach a trade deal remain good, though the breadth of the deal remains uncertain, and won't likely be clear until October's EU leaders' summit (despite UK's chief trade negotiator Frost saying last Friday that he thinks a deal is possible as soon as September). The UK government has implemented a further post-epidemic reopening, with bowling allies and other "soft play areas" now reopening. The UK, like the rest of Europe, is through the coronavirus cycle, although a "feardemic" persists based on the advent of rising case numbers in certain areas, despite a crystal-clear lack of corresponding increases in actual public health events (clinical cases, hospitalizations, mortalities), which is very similar to the pattern seen during the latter stages of the swine flu epidemic of 2009 before the virus fizzed out due to community immunity. We anticipate incoming data, including the preliminary July PMI surveys of private sector activity (to be released this Friday) will show a plateauing in the UK's recovery trajectory, exacerbated by a number of localized lockdowns across the UK and new travel restrictions with foreign countries. The government's furlough scheme will end in late October, too, which is likely to trigger a wave of job losses, particularly in the aviation, retail and hospitality sectors. Overall, we don't for now anticipate much upside potential for the pound.

[USD, CHF]
EUR-CHF has been holding around 1.0750-1.8000 for about a month now. The influence of the SNB's intervening hand seems to have been helping keep the cross buoyant, especially with upside momentum in EUR-USD flagging. Weekly sight deposit figures out of Switzerland have been suggesting that the central bank has been continuing to sell francs, as it has been since the consequences of the pandemic took a grip on markets, which had the impact of increasing demand for the Swiss currency. A rise in sight deposits (money held by commercial banks) can suggest francs turning up after being sold by the central bank. EUR-CHF clocked a seven-month peak early June at 1.0921 before settling lower. 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 will help the SNB combat what it sees as a chronically overvalued franc.

[USD, CAD]
USD-CAD has settled in the mid 1.3200s, above the eight-month low of yesterday at 1.3190. A weakening U.S. dollar, coupled with perky oil prices have been weighing on the pair in recent months, which we anticipate will retain a down-trending bias. USD-CAD pair has been trending lower, albeit with waning momentum, since mid March. The global economic recovery from lockdowns, which were at their zenith in April, has been instrumental in USD-CAD's downtrend, with the Canadian currency rising concomitantly with oil prices while the U.S. currency has waned as a safe haven unit, and with negative real U.S. yields (on the view that the Fed may become strategically more tolerant of inflation risk) eroding the greenback's performance. The Canadian dollar will continue to remain sensitive to fluctuations in the U.S. dollar and oil prices. Downside risks for the Canadian dollar include the OPEC+ group's course to easing output quotas, which could weigh on oil prices, alongside the coronavirus pandemic and geopolitical tensions, should they derail the recovery in global asset markets.