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By XE Market Analysis April 28, 2020 3:45 am
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    XE Market Analysis: Europe - Apr 28, 2020

    Commodity currencies have seen moderate losses against the dollar and other main currencies against a backdrop of sputtering low-volume stock market trading and a turn lower in oil prices. The Kiwi dollar led the way lower for the commodity group after a research note from Westpac hit a bearish chord by forecasting the RBNZ to take the cash rate to -0.5% in November this year. RBNZ Governor Orr last week said he would not rule out negative rates, and that is was "open minded" on direct monetisation of government debt. NZD-USD dropped over 0.6% in printing a four-day low at 0.5992. With the RBA having recently been ruling out going negative with interest rates, AUD-NZD rallied to a fresh six-month high, at 1.0754. The antipodean cross has now risen by nearly 7% since mid March. Note that weekly consumer confidence out of Australia, not normally a market shaker, posted a fourth straight week of improvement from the record low that was seen in March, although the headline is still overall pessimistic at a sub-100 reading of 85.0. As for oil prices, June WTI futures were showing a drop of 16%, at $10.66, as of early London session. This follows news that United States Oil Fund LP, the largest U.S. oil ETF, said it would sell all its front-month crude contracts to avoid further losses amid collapsing prices. This weighed on oil-correlating currencies, including the Canadian dollar, which lifted USD-CAD out of a five-day low at 1.4017 to levels above 1.4070. Among the dollar majors there has been little movement. EUR-USD has seen little more than a 20 pip range in the lower 108.00s, holding above yesterday´s 108.08 low. USD-JPY has seen a sub-20 pip range in the lower 107.00s, holding above yesterday's 13-day low at 106.99. The BoJ boosted its JGB purchases at its scheduled operation, but to little impact on the yen. Cable settled in the low 1.2400s, down on the eight-day low seen yesterday at 1.2456.

    [EUR, USD]
    EUR-USD has seen little more than a 20 pip range in the lower 108.00s, holding above yesterday´s 108.08 low, and the one-month low that was seen last week at 1.0726. This week brings policy meeting at both the Fed and the ECB. The former is expected to be a non-event for markets, with no change widely anticipated (having already done so much to respond to the pandemic), while the ECB is likely to extend its debt purchases to include junk bonds. The outcome of the meetings aren't likely to impart much impact on EUR-USD. In the Eurozone, Italy managed to escape a ratings downgrade with S&P affirming the BBB rating after the close on Friday. Many countries in Europe are also starting a phased reopening of their economies, which is also being seen in some U.S. states. The euro saw some underperformance last week after EU leaders failed to come up with a deal on a trillion Eurozone recovery fund, although signing-off the finance minister's agreement on immediate crisis measures. The focus was on a temporary facility and loans, rather than perpetual Eurobonds and joint financing. Fault lines between southern and eastern European states also emerged. EUR-USD remains to the south of the halfway mark of the volatile range that was seen during the height of the market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. The pairing currently lacks a clear directional bias.

    [USD, JPY]
    USD-JPY has seen a sub-20 pip range in the lower 107.00s, holding above yesterday's 13-day low at 106.99. The BoJ boosted its JGB purchases at its scheduled operation, but to little impact on the yen. The BoJ yesterday delivered on expectations, announcing that JGB purchases can now be unlimited (formerly capped at Y80 tln per year) while also announcing an increase in corporate bond and commercial paper. The yen hasn't been impacted, with move largely symbolic as the central bank's 0% target on the 10-year JGB was being met without the need for unlimited purchases. With the global rate of coronavirus infection in decline, global stock market sentiment has been buoyed by the commencement of a phased reopening in major economies. Without a vaccine, much will depend on economies return to function without causing a second wave of inflections. The phased approach will also rule out the possibility for there being a V-shaped global economic rebound. With a vaccine not likely to be available until at least next year, one hope is that diagnostic testing becomes so widespread that it would turn the coronavirus from an invisible entity to a visible one, which would allow effective isolation of those infected. But, most countries remain a long way from that (at bet so far achieving a few dozen tests per 1000 people). For now, we expect USD-JPY to continue to trade without a clear directional bias.

    [GBP, USD]
    Cable has settled in the low 1.2400s, down on the eight-day high seen yesterday at 1.2456. The pound was buoyed on Monday by Prime Minister Johnson's return to work after recovering from his brush with Covid-19, and, while Johnson said that it was still too early to ease the lockdown, the UK Treasury is reportedly drawing up measures to "get Britain back to work," including plans for "Covid-secure offices." Recent gains in global stock markets have also lifted the pound, which has been apt to perform similar to other "risk-off" currencies, such as commodity currencies, during the pandemic crisis. The pound is up by over 8% from the 35-year seen in March, but is down by 6% on the year-to-date. The combo of the UK's open economy, current account deficit and outsized financial sector, has meant that the pound has been vulnerable to risk aversion in global markets. With the global rate of coronavirus inflection in decline, and major economies starting a phased reopening, the tide looks to be shifting, though this assumes that the reopening can be done without causing a second wave of infections. This backdrop should help support the pound, though the continued risk for the UK leaving the post-Brexit transition membership of the EU's single market at the end of the year should curtail upside potential.

    [USD, CHF]
    The SNB has successfully been putting a cap on the franc, which has seen EUR-CHF in recent weeks skirt along just above the five-year low that was first seen on March 9th at 1.0505 without breaching it. Weekly sight deposit data out of Switzerland has pointed to the extent of SNB franc selling over the pandemic crisis period, which was most acute in March before basing out as global governments and central banks acted with interventions and stimulus packages. A rise in sight deposits (money held by commercial banks) can suggest the francs turning up after being sold by the central bank. Total sight deposits rose by CHF 28.6 bln over the last four weeks, at a diminishing rate (rising by just 3 bln in the last week, through to April 16th) as the demand for the Swiss currency as a safe haven tapered off. The 1.0500 level in EUR-CHF, while not a fixed floor, has clearly been a line in the sand of the SNB. The Swiss central bank has a long history of intervening to either limit of slow the pace of appreciation in its currency, which normally comes during periods of risk aversion in global markets and/or euro underperformance. From 2011 through to 2015, the SNB capped the franc via a 1.2000 floor in EUR-CHF. When the cap was abandoned in January 2015, the franc rallied by 30%, having become unfeasible for the SNB to counter the ECB's expansive monetary policies. A similar circumstance is afoot today, with the ECB maintaining expansive polices following a period of safe haven demand for the franc. In January, the U.S. added Switzerland to its list of currency manipulators. The move seemed a bit harsh given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argued that Switzerland should pursue a more expansive fiscal policy as a remedy.

    [USD, CAD]
    Hefty declines in oil prices have weighed on the Canadian dollar, along with other oil-correlating currencies, lifting USD-CAD out of a five-day low at 1.4017 to levels above 1.4070. June WTI futures were showing a drop of 16%, at $10.66, as of early London session. This follows news that United States Oil Fund LP, the largest U.S. oil ETF, said it would sell all its front-month crude contracts to avoid further losses amid collapsing prices. Goldman Sachs research concluded last week that global oil storage capacity would be reached within three or four weeks, which, once realized, would force a 20% cut in production. Such a cut would be tantamount fo 18-20 mln barrels per day, which would be on top of the 9.7 mln barrels per day cut by OPEC++ nations, which will takes effect on May 1st. GS estimated it would take between four and eight weeks for crude to base, noting that the production cuts won't be easy to reverse, which in turn would risk there being a supply deficit.

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