XE Market Analysis: Europe - Sep 02, 2020

Narrow ranges have been prevailing among the main currencies so far today. The dollar managed to lift modestly, recovering slightly from the trend lows of yesterday. EUR-USD ebbed to a two-day low at 1.1885, extending a correction from Tuesday's 28-month peak at 1.2012. A profit taking impulse after the 1.2000 level was breached has been highlighted by some market narratives. The negative inflation print out of the Eurozone yesterday also re-focused attention on the ECB, which is considering following the Fed by strengthening the "lower for longer" message with a shift to a more symmetric inflation target as part of its framework review. Next week's ECB Governing Council policy meeting will be a big focus with regard to this. While bearish dollar sentiment is strong in the market, the run-in to ECB's meeting may disrupt the trend somewhat. Continued signs of a total impasse in trade negotiations between the EU and UK may also serve as a check on the upside of both EUR-USD and Cable, while at the weekend UK government plans to raise taxes in the UK to partially pay for the cost of the lockdown earlier in the year and ongoing restrictions. The S&P 500 and Nasdaq, meanwhile, hit further record highs yesterday, as Wall Street continued to outperform global peers, while the August U.S. manufacturing ISM hit two-year highs, highlighting a brisk economic recovery. The coronavirus spread was later to arrive in the U.S. than Europe and Asia, but the "U.S.-faring-worse-than-Europe" narrative with regard to the pandemic is likely to fade, with daily new coronavirus cases now trending lower, along with severe illness and death totals (fitting a classic Gompertz curve of contagious respiratory disease outbreaks). This will allow the U.S. economy to open up further, which would have the potential to erode the perceived growth differential between it and its peers.

[EUR, USD]
EUR-USD ebbed to a two-day low at 1.1885, extending a correction from Tuesday's 28-month peak at 1.2012. A profit taking impulse after the 1.2000 level was breached has been highlighted by some market narratives. The negative inflation print out of the Eurozone yesterday also re-focused attention on the ECB, which is considering following the Fed by strengthening the "lower for longer" message with a shift to a more symmetric inflation target as part of its framework review. Next week's ECB Governing Council policy meeting will be a big focus with regard to this. While bearish dollar sentiment is strong in the market, the run-in to ECB's meeting may disrupt the trend somewhat. Continued signs of a total impasse in trade negotiations between the EU and UK may also serve as a check on the upside of both EUR-USD and Cable, while at the weekend UK government plans to raise taxes in the UK to partially pay for the cost of the lockdown earlier in the year and ongoing restrictions. The S&P 500 and Nasdaq, meanwhile, hit further record highs yesterday, as Wall Street continued to outperform global peers, while the August U.S. manufacturing ISM hit two-year highs, highlighting a brisk economic recovery. The coronavirus spread was later to arrive in the U.S. than Europe and Asia, but the "U.S.-faring-worse-than-Europe" narrative with regard to the pandemic is likely to fade, with daily new coronavirus cases now trending lower, along with severe illness and death totals (fitting a classic Gompertz curve of contagious respiratory disease outbreaks). This will allow the U.S. economy to open up further, which would have the potential to erode the perceived growth differential between it and its peers.

[USD, JPY]
USD-JPY has been holding a narrow range anchored around the 106.00, which roughly markets the midway point of the range that's been seen over the last month, for over a day. 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]
Sterling is softer today. Cable has dropped back to the lower 1.3300s, down from the eight-and-a-half month high that was printed yesterday at 1.3484. This left December's 1.3516 peak unchallenged. A rise above this level would put the pair in 28-month terrain. The pound is now showing year-to-date gains on the dollar, though remains net lower versus most other peer currencies over this period; more than 5% lower in the case against the euro. A fractional revision lower in the UK's August manufacturing PMI headline figure had little impact. The survey highlighted areas of concern, however; a rapid depletion in the work backlog that was built up as a consequence of the lockdown points to spare capacity, which along with dropping employment levels is an ominous sign heading into the expiry of the government's wage support scheme in October. The service sector will be even more exposed to the ending of wage support, with aviation, high street retail and the hospitality sectors particularly vulnerable. There is pressure on the government to extend. Germany extended its furlough scheme by two years. Without an extension, the UK's recovery, which mostly exceeded expectations over July and August, is likely to slow in the months ahead, which in turn would rekindle speculation of the BoE taking interest rates negative. Another risk facing the pound are possible tax hikes, with the government leaking to the press over the weekend ideas for raising them. Then there is Brexit. The latest press reports, which include unnamed source input, tell of a total impasse in negotiations. Leaving the EU's single market at year-end without a replacement deal, when taxes rising, would be a powerful downward driver of the pound. Note that when UK leaves the single market, it will not just be leaving free trade with the EU but also the 40 free trade deals the EU has across the globe. UK trade would switch to WTO rules until such time new trade deals have been made, which will take years.

[USD, CHF]
EUR-CHF spiked sharply yesterday, which produced 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. 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 should help the SNB combat what it sees as a chronically overvalued franc. 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 found a footing after pegging an eight-month low at 1.2992 yesterday. A rebound in the U.S. currency has been at play. Strong August manufacturing data out of the U.S., along with Wall Street's continued record-breaking streak, have challenged the U.S. currency's bear trend, although bearish sentiment remains strong. Oil prices have continued to trade neutrally, holding below the six-month highs that were printed last week. Hurricane Laura wasn't as disruptive to Gulf of Mexico crude production as feared. The pair only needs to fall below last December's nadir at 1.2949 to put it in 23-month low territory. We advise trend following. Prospects for continued global economic recovery from lockdowns look good, which in turn would be supportive of oil prices and the Canadian dollar. The daily rate of new coronavirus cases in the U.S. is trending down, and -- much more importantly -- is the incidence of severe/critical illness and deaths. In Europe, the "casedemic" continues in most countries but remains unaccompanied by an actual public health event (severe illness and deaths). Sweden -- where there has been no lockdown and no facemask mandate -- continues to be shining light, with new cases now dropping to very low levels, while severe illness and death rates have been bumping along at low levels, trending to near zero, for months. The point being, the pandemic in major economic regions is no longer really a pandemic, although a 'casedemic'/'feardemic' persists. False positives in the PCR tests used for the SARS Cov-2 coronavirus are a known problem.