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By XE Market Analysis April 30, 2021 4:47 am
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    XE Market Analysis: Europe - Apr 30, 2021

    The dollar is trading with some buoyancy after basing at new trend lows yesterday. The narrow trade-weighted DXY USD index lifted back above 90.70 after printing a two-month low yesterday at 90.42. EUR-USD concurrently ebbed back to near the 1.2100 level from its two-month high at 1.2150, and USD-JPY settled slightly off yesterday's 17-day high at 109.22. The 10-year U.S. T-note yield, which remains a fixation for forex markets, has been orbiting the 1.650% level over the last day -- remaining up by over 10 bp on the lows that were seen last week. A cautious sentiment has returned in global markets. The S&P 500 posted yet another record closing high yesterday, though the Nasdaq dropped back from a record intraday peak, and sentiment has subsequently soured with U.S. equity futures and Asian stock markets coming under pressure, despite Amazon reporting an earnings beat after the Wall Street close yesterday. As Reuters highlighted, just over half of S&P 500 companies have divulged their quarterly earnings, with 87% having beaten expectations, the highest level in recent years. But, rising input prices and, in the U.S., a planned rise in corporate tax, juxtaposed to lofty valuations, seems to have been be curtailing upside momentum on Wall Street lately, even while the main indices have been scraping out new highs. Elsewhere, USD-CAD edged out a fresh three-year low at 1.2266 in what is amid the pair's 10th month of decline out of the last 13 months. The pair is strong correlate of oil prices, which although settling off the six-week highs that were seen yesterday, still remain up by over 6% from the lows that were seen last week -- and by 226% from year-ago levels. In data today, April PMI data out of China were mixed, with the official surveys on manufacturing and non- manufacturing disappointing median forecasts and falling below prior-month levels, while the private Caixin/Markit manufacturing PMI exceeded expectations.

    [EUR, USD]
    EUR-USD has settled lower after posting a two-month high at 1.2150 yesterday. The high was a consequence of another bout of dollar selling, prompted by the Fed's refrain this week 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 settled slightly off yesterday's 17-day high at 109.22. The 10-year U.S. T-note yield, which remains a fixation for forex markets, has been orbiting the 1.650% level over the last day -- remaining up by over 10 bp on the lows that were seen last week. This backdrop should keep USD-JPY underpinned. Note that Japanese markets will be closed Monday through to Wednesday next week, as will Chinese markets.

    [GBP, USD]
    The pound has corrected some after posting gains versus the other G10 currencies over the last day, led by GBP-JPY which is printed a 24-day high before coming off the boil. Cable has settled in the lower 1.3900s after hitting a 10-day high at 1.3977 yesterday. The UK currency has over the last month underperformed, aside from the case against the dollar and yen, 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.

    [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 edged out a fresh three-year low at 1.2266 in what is amid the pair's 10th month of decline out of the last 13 months. The pair is strong correlate of oil prices, which although settling off the six-week highs that were seen yesterday, still remain up by over 6% from the lows that were seen last week -- and by 226% from year-ago levels.

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