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By XE Market Analysis April 29, 2021 4:15 am
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    XE Market Analysis: Europe - Apr 29, 2021

    The dollar resumed its now four-week down trend, earlier posting a two-month low at 90.42 by the measure of the DXY index. Speculation that the Fed might have at least hinted at a tapering, which hadn't been our view, was thwarted, and longer-dated Treasury yields and the dollar duly took a turn lower. The 10-year T-note yield was pressed back under 1.62% after yesterday foraying above 1.65% ahead of the Fed's announcement. The limited magnitude of movement shows that most market participants viewed the FOMC as being uneventful, and the Fed's description of inflation pressures as likely being "transitory" as unsurprising. Wall Street wasn't too inspired, either, though S&P E-mini and Nasdaq 100 futures subsequently racked up gains of over 0.5% in trading on Globex following stellar earnings reports, released after the close of Wall Street, from Apple and Facebook. Samsung subsequently followed-up with an earnings beat. In the absence of Japanese markets, closed for a holiday, most Asian stock markets gained, led by Chinese and Hong Kong indices. Base metals rallied, with copper and aluminium prices, for instance, hitting respective 10- and three-year highs. Front-month WTI oil price futures hit a six-week high at $64.53 in the wake of the Fed. Not surprisingly, the dollar bloc and other cyclical currencies rallied against this backdrop. AUD-USD and AUD-JPY both ascended into respective six-week high terrain, while USD-CAD fell to a three-year low, at 1.2285. CAD-JPY, a cross we have been bullish on for some months now, rose above its Q1 highs on route to printing a 30-month high at 88.42. USD-JPY, which at the moment has a virtual mechanical link with the 10-year U.S. Treasury over JGB yield differential, ebbed from levels near 109.00 to a post-Fed low at 108.53. The pair subsequently rebounded some, but remained below pre-Fed levels. EUR-USD posted a two-month high at 1.2150 on the back of the dollar's softness. Sterling, which has developed a pandemic-era proclivity to correlate positively with risk appetite in global markets, posted a nine-day high versus the dollar while hitting respective 2- and 9-day highs against the euro and yen. Focus today will be on U.S. Q1 GDP data, which is expected to show strong 5.8% y/y growth clip alongside a spike in chain prices, and weekly jobless claims, which are expected to show another sizeable fall in the continuing claims figure.

    [EUR, USD]
    EUR-USD lifted to a two-month high at 1.2150 on dollar weakness, which was a consequence of the Fed's refrain from even hinting at policy tapering in the face of accelerating growth and inflation perkiness. The Fed's evident success over the last month in turning around the inflation risk narrative, by stressing that the economy is a long way from full capacity, paid dividends in terms of taming bond vigilantes. The Treasury market was perhaps ripe for a rebound in April after putting in its worst quarterly performance in 34 years in Q1. But, with the U.S. economy building up a head of steam on the back of the Covid vaccine rollout, alongside the release of pent-up consumer demand and outsized record-level of fiscal stimulus, and with a central bank that remains steadfastly in uber-accommodative mode, the risks for inflation are to the upside. We have been noting that the upward trajectory for U.S. price increases into 2021 extends beyond the "base effects" that are clearly lifting the y/y measures. In April data (released mid May) we expect CPI gains of 0.2% for both the headline and core. The y/y CPI gain should surge to 3.6% from 2.6%, while the y/y core price gain should climb to 2.2% from 1.6%. We expect y/y CPI gains to extend in May of around 3.8% for the headline and around 2.5% for the core. The recent weakness in the dollar will add upside risk to inflation, which in turn should help set the stage for a rebound in the U.S. currency. In sum, a rising bias in longer-dated U.S. yields is likely to re-establish as markets return to pricing in contingency risk that the Fed may be forced to tighten much sooner than the 2024 start point for tightening that it has been signalling. As for the euro, peak pessimism about the Covid situation looks to have passed, and Eurozone growth and inflation are set to rise, but lag the U.S. The ECB left policy settings unchanged last week while signalling an unambiguously dovish bias and kicking the decision on whether to extend the PEPP (Pandemic Emergency Purchase Program) down the road. We continue to anticipate that the directional bias of EUR-USD will shift back to the downside before long.

    [USD, JPY]
    USD-JPY, which at the moment has a virtual mechanical link with the 10-year U.S. Treasury over JGB yield differential, ebbed from levels near 109.00 to a post-Fed low at 108.53. The pair subsequently rebounded some, but remained below pre-Fed levels. AUD-JPY, meanwhile, ascended into six-week high terrain, while CAD-JPY, a cross we have been bullish on for some months now, rose above its Q1 highs on route to printing a 30-month high at 88.42.

    [GBP, USD]
    Sterling, which has developed a pandemic-era proclivity to correlate positively with risk appetite in global markets, posted a nine-day high versus the dollar while hitting respective 2- and 9-day highs against the euro and yen. Sterling has over the last month underperformed the currencies we track (being the G10 units plus several others), aside from the case against the dollar, but still registers as an outperformer on the year-to-date, with only the oil-correlating Canadian dollar and Norwegian krone having risen by a greater extent than the UK currency. We retain a bullish view on the pound against the euro, and more especially the low-yielding currencies of surplus economies, such as Japan and Switzerland, which is hinged on the expectation that the global pandemic recovery trade will continue into 2022. The UK's main equity indices are replete with globally-focused cyclical stocks, which should benefit as major economies rebound. The broad trade-weighted value of the pound still remains near historically weak levels, too. These factors will have to offset any erosion in UK productivity and investment that may become apparent as a consequence of Brexit. UK local elections in early May will warrant monitoring, particularly with regard to how the pro-independence parties fare, and whether they can reach a supermajority in the Scottish parliament. This would legitimise their calls for another independence referendum, though polls have been tipping out of their favour lately. It's a close call: Politico's poll-of-polls tracker currently shows 46% favour remaining in the UK with 45% favouring an exit, with the remaining 9% undecided.

    [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]
    USD-CAD fell to a three-year low, at 1.2285, amid weakness in the dollar and a degree of Canadian dollar outperformance, with the oil-correlating currency benefiting from the rise in risk appetite in the wake of the Fed's refrain from even hinting at a policy taper, alongside strong incoming corporate earnings results. CAD-JPY, a cross we have been bullish on for some months now, rose above its Q1 highs on route to printing a 30-month high at 88.42. The Canadian dollar has been underpinned since the BoC surprised last week by trimming QE purchases to $3 bln per week from 4 bln, with policymakers bringing forward their forecast for a return to full capacity growth to the second half of 2022 from 2023. The Fed's signalling yesterday contrasted this, and at the same time, in a further bearish influence on USD-CAD, lifted oil prices. Front-month WTI oil price futures hit a six-week high at $64.53 in the wake of the Fed. The OPEC+ group's decision this week to lift output quotas in May caused a degree of sputtering in oil price action, but overall been digested well in markets, which have bought into forecasts for rising oil demand out of major economies. The evident success in Covid vaccination programs in countries that have advanced rollouts has encouraged bullish demand forecasts. With regard to ongoing pandemic concerns, particularly the situation in India (which is the world's third biggest importer of oil), lab tests have found that existing vaccines still offer a good degree of protection against the new variant there. With global vaccine production capacity ramping up month by month, there remain good grounds for optimism.

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