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By XE Market Analysis April 7, 2021 4:17 am
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    XE Market Analysis: Europe - Apr 07, 2021

    The dollar has posted fresh lows, which put the DXY index at a 15-day low at 92.95. The forex market appears to have been somewhat wrong-footed by a pronounced decline in Treasury yields. Inflation worries have been fading a bit, at least for now, as Fed policymakers continue to stress they do not see any problem with price pressures for the foreseeable future. The Fed has also assured it will not hike rates pre-emptively, needing to see real evidence that their goals are being met before acting. At the same time there has been a sputtering phase in U.S. stock markets after the bellwether U.S. indices scaled to record highs on Monday, which has induced a safe haven bid for Treasuries. Investors are digesting prospects for higher corporate taxes linked to President Biden's $2 bln infrastructure plan, which analysts at GS reckon would trim 9% of earnings per share for companies listed in the S&P 500. The 10-year Treasury yield has pressed below 1.640%, down by around 8 bp from yesterday's high. This backdrop has fostered a reversal of recent themes in the currency market, aside from the correction in the dollar, with the yen and euro, currencies that have lately been found in the underperforming lane more often than not, having rebounded notably over the couple of days. EUR-USD has pegged a 15-day high at 1.1883, setting up the pair for what might be its second down week out of the last seven. USD-JPY has dropped to a nine-day low at 109.58, setting up what could be the pair's second down week out of the last six. The biggest movers out of the main currencies we monitor have been EUR-CAD and CAD-JPY. The Canadian dollar, which has been amongst the strongest currencies on the year so far, being a principal winner in the reflation trade due to its correlation with oil prices, had been looking due for a correction, with the oil price rally having lost traction in recent weeks. This has lifted USD-CAD to eight-day highs above 1.2600, despite the prevailing broader weakness in the greenback. The pound has also found itself in the underperforming lane, with EUR-GBP, most notably, having rebounded quite sharply after the cross printed a 14-month low on Monday. Despite the prevailing losses, the UK currency still remains one of the strongest performing currencies when measured from the start of the year.

    [EUR, USD]
    EUR-USD has tested the waters below 1.1800 after making a 12-day peak at 1.1821. We remain bearish of the pairing. Yield differentials, although having corrected in recent days, are likely to remain tilted in the dollar's favour. ECB policy remarks have of late stressed that there is an ongoing need for monetary accommodation, remarks which won't surprise anyone but nonetheless a reaffirmation of the central bank's commitment to ultra accommodative policy nonetheless. The ECB earlier in the month surprised markets by announcing a ramp up in its asset purchase program in an effort to dampen rising yields. Markets are focusing on the outlook for growth and yield differentials, and the U.S. economy is widely seen outpacing the Eurozone and other peers this year, thanks in large part to the massive fiscal spending spree along with the more advanced vaccination rollout in the U.S. This comes with Eurozone interest rates being near the most negative in the world (Swiss rates being the exception), and there is little prospect for the ECB to tighten policy on the horizon, contrasting to the debate about the Fed, and the possibility it may be forced to tighten sooner than expected given the regime change in U.S. economic policy.

    [USD, JPY]
    USD-JPY has dropped to a nine-day low at 109.58, setting up what could be the pair's second down week out of the last six. This has come with U.S. Treasury yields having pulled back nearly 10 bp over the last day, which has fostered a correction in recent currency market themes.

    [GBP, USD]
    The pound has softened against most peer currencies over the last day. Cable has posted a six-day low at 1.3772, down on the 18-day high seen yesterday at 1.3920. The biggest moves have been seen against the yen and euro, which have outperformed the main currencies we keep tabs on over the last day. This is something of a reversal of recent themes, with the yen and euro having lately been found in the underperforming lane more often than not, while the pound, along with the dollar and dollar bloc currencies, registers among the currency outperformers on the year so far. Yield differential dynamics appear to be at play today, with U.S. Treasury and Gilt yields dropping back more than JGB and Bund yields at the 10-year and other mid- to longer dated maturities. The lacklustre performance of U.S. equities after the in main indices clocked new record highs on Monday appears to be a reason for the softening in yields. Investors are digesting prospects for higher corporate taxes linked to President Biden's $2 bln infrastructure plan, which analysts at GS reckon would trim 9% of earnings per share for companies listed in the S&P 500. Taking a step back, we retain an overall bullish view of the pound, especially against the euro and yen. Sterling on Monday printed a 14-month high versus the euro, which although occurring in holiday-thinned trading reflected the contrasting fortunes of the reopening UK economy with the re-restricted economies across the Channel. The rate of new Covid cases in the UK is now 4% of what it was at the peak seen in early January, despite a more than doubling in testing over that time, while the death rate is less than 3% of what it was at the highs. This stands in marked contrast to the scene in much of continental Europe.

    [USD, CHF]
    Policymakers at the SNB retain a chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

    [USD, CAD]
    The Canadian dollar, which has been amongst the strongest currencies on the year so far, being a principal winner in the reflation trade due to its correlation with oil prices, had been looking due for a correction, with the oil price rally having lost traction in recent weeks. This has lifted USD-CAD to eight-day highs above 1.2600, despite the prevailing broader weakness in the greenback. Notable corrections have at the same time been seen in the Canadian dollar versus the euro and yen.

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