Currency Market Analysis

Sep 03, 2020 | Currency Market Analysis

Global Themes

USDCAD back to weekly tops ahead of employment numbers.

The USDCAD was able to break the 1.3100 level through the early European session this morning mainly due to a stronger USD. The USD strength against a basket of 6 currencies (DXY) was driven by the discomfort of ECB with a strong EUR after reaching 28 month high this week . Apart from this, the fear from a falling demand in oil from the US and a slow economic recovery from the pandemic drove oil prices near multi-week lows putting some pressure on the commodity linked currency (CAD). The main focus remains on tomorrow’s employment numbers from the US and Canada to determine the short term direction of the currency pair.

USD

The US Dollar bounced off key levels against EUR, GBP and JPY this week and the US Dollar index, which tracks the dollar’s strength against a basket of currencies, also rebounded off a long-term moving average. Is this just a short term correction or will the dollar uptrend resume?

Given the negative real yield narrative in the US now that interest rates are near zero and the Federal Reserve is implementing an average inflation targeting strategy, the dollar has been dumped aggressively recently. There are arguments for further dollar weakness and for another currency or asset to dethrone the dollar as the world’s currency of choice, but given speculative “short” positions on the dollar are at extreme levels, there is also an argument brewing for an extended correction higher for the US currency. This could drag EUR/USD back towards the $1.14 handle whilst GBP/USD could retest the psychological $1.30 level.

  • Final global services PMI figures are released later today as well as US non-manufacturing index and the usual weekly jobless claims, but most attention is on the US jobs report slated in for Friday afternoon.

EUR

Has the Euro’s rapid appreciation come to an abrupt end and by how much might it weaken in the short term? Although EUR/USD is still over 10% higher since its March low near $1.06, the currency pair has corrected about two cents lower since hitting a 28-month high earlier this week. The weaker Euro has also allowed GBP/EUR to jump to new 12-week highs.

Comments by European Central Bank (ECB) chief economist, Philip Lane, yesterday may have marked the first of many verbal interventions to try and prevent the Euro from strengthening much more from here. The upbeat market attitude of late has boosted global stock markets and riskier currencies higher but has also helped the cyclical Euro climb despite the extreme “long” positioning of the common currency. Recoveries in the Eurozone are often kick-started by net exports, so because a stronger Euro may obstruct this, ECB policymakers may attempt to limit its appreciation by talking up more monetary accommodation and fiscal stimulus.

GBP

As well as the rebound of the US Dollar dragging GBP/USD two cents lower in 24 hours, Bank of England (BOE) governor and fellow rate setters warned of risks to the UK economy being greater than first thought. More stimulus was hinted at to try and support the economy, which is weighing on the pound.

The UK economy shrank by more than 20% in the second quarter of this year, worse than most major economies and BOE policymakers warned it could take several years for Britain's economy to return to full capacity. The BOE has already implemented a £745bn bond-buying programme to combat the economic impact caused by the pandemic, but more quantitative easing may be on the horizon. Moreover, pessimistic comments by the EU’s chief Brexit negotiator regarding a UK-EU trade deal by year-end also tainted sterling sentiment.

  • GBP/USD abandoned its climb to $1.35 and has retreated back under the $1.33 handle. However, GBP/EUR extended north of the €1.12 mark, buoyed by the 2-cent slide in EUR/USD, which has weakened the Euro across the board.


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