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By XE Market Analysis February 15, 2021 4:40 am
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    XE Market Analysis: Europe - Feb 15, 2021

    The dollar has been trading softer amid a resumption in the reflation trade, and despite the strong rise in U.S. Treasury yields, which has seen the 10-year note yield rise above 1.20% and the 30-year bond yield cheapen above 2.0%. Global stock markets are back in rally mode, oil prices high fresh 13-month highs, and base metals rallied, putting copper and aluminium at fresh multi-year highs. Data out of Asia fuelled the bullish sentiment, Japanese preliminary Q4 GDP for rising 3.0% q/q (versus the median expectation for 2.4%), while Singapore Q4 GDP similarly beat forecasts +3.8% q/q, while South Korea's first 10 days of February exports surged 39.3%. Against this backdrop, the DXY dollar index ebbed below Friday's low, to 90.30. Three-week lows seen last week are at 90.25-26. A notable outperformer has been the pound, with Cable rising 0.5% to trade above 1.3900 for the first time since April 2018. A high was posted at 1.3910. At the same time, the UK currency pegged a nine-day high versus the euro and a fresh 14-month peak against the yen. News that the UK government reached its target to vaccinate the top four most vulnerable groups to Covid gave markets reason to buy pounds, which is amid what could be described as a crawl out of historically weak trade-weighted valuations with four-and-a-half years of Brexit uncertainty having finally passed. Only Israel and UAE have vaccinated faster than the UK, and the contrast with the situation in the EU has been lately been mooted in market narratives as being a bearish factor for EUR-GBP. Elsewhere, EUR-USD lifted above its Friday high in making a 1.2145 peak. Last week's 17-day high is at 1.2150. Despite the dollar's general weakness, USD-JPY still pegged a six-day high at 105.22 on the back of yen underperformance. The biggest movers have been the GBP-JPY and AUD-JPY crosses, both of which were showing about a 0.8% gain on the day (as of early London trading). AUD-USD printed a one-month high at 0.7788, drawing back in on the 35-month peak that was seen in early January. The other dollar bloc currencies have also been notable gainers. USD-CAD came within a couple of pips of last week's 24-day low at 1.2658. Front-month WTI oil futures rallied over 2% to a 13-month high at $60.95. A flaring up in the Yemeni civil war boosted crude prices, in addition to reflation-trade positioning, which is being aided by the ongoing tumble in world-wide positive Covid test results (now one third the January peak), alongside vaccination programs and prospects of stimulus spending in the U.S. and EU.

    [EUR, USD]
    EUR-USD lifted above its Friday high in making a 1.2145 peak. Last week's 17-day high is at 1.2150. EUR-JPY hit a 26-month high, though the euro has weakened versus the pound and dollar bloc currencies. Both the dollar and yen have been underperforming amid a resumption in the globa reflation trade. We are bullish on EUR-USD in the medium- to-longer-term view, which hinges on our view for the global recovery trade to sustain over the coming weeks and months. The dollar is richly valued by the measure of the broad real effective exchange rate. Amid this context, the Fed is committed to an inflation tolerant, lower-for-longer policy posture, which is in essence a pro soft-dollar policy given the implication for declining real interest rates. The idea here, with regard to exchange rate determination, is that the Fed may have more luck in stimulating inflationary pressures than the ECB. This would in turn put further downward pressure on the U.S. real interest rate compared to the Eurozone. To illustrate: while U.S. Treasury yields have been rising steeply, inflation-adjusted "real" yields in the U.S. have been falling. The real constant maturity Treasury yields on both the 5- and 7-year maturities last week, for instance, hit fresh major trend lows of -1.86% and -1.46%, respectively.

    [USD, JPY]
    The yen has been underperforming amid a resumption in the reflation trade. USD-JPY pegged a six-day high at 105.22. The biggest movers have been the GBP-JPY and AUD-JPY crosses, both of which were showing about a 0.8% gain on the day (as of early London trading). Data out of Asia fuelled the bullish sentiment, Japanese preliminary Q4 GDP for rising 3.0% q/q (versus the median expectation for 2.4%), while Singapore Q4 GDP similarly beat forecasts +3.8% q/q, while South Korea's first 10 days of February exports surged 39.3%.

    [GBP, USD]
    The pound has found itself in the outperforming lane of currencies once again. Cable rose 0.5% to trade above 1.3900 for the first time since April 2018. A high was posted at 1.3910. At the same time, the UK currency pegged a nine-day high versus the euro and a fresh 14-month peak against the yen. News that the UK government reached its target to vaccinate the top four most vulnerable groups to Covid gave markets reason to buy pounds, which is amid what could be described as a crawl out of historically weak trade-weighted valuations with four-and-a-half years of Brexit uncertainty having finally passed. Only Israel and UAE have vaccinated faster than the UK, and the contrast with the situation in the EU has been lately been mooted in market narratives as being a bearish factor for EUR-GBP. UK data calendar this week is highlighted by January inflation data next week (Wednesday), where the median expectations is for headline CPI to ebb back to a 0.5% y/y rate. This would fit BoE projections, with the central bank anticipating a sharp rise back toward the 2% target over the coming months, when base effects (caused by the impact of last year's March-June lockdown) will drive y/y price comparisons higher. January retail sales are also due (Friday), where a 1% m/m contraction is expected.

    [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 came within a couple of pips of last week's 24-day low at 1.2658, while the Canadian dollar pegged a four-day and one-year high against the euro and yen, respectively. Buoyant oil prices have continued to underpin the Canadian dollar and other crude-correlating currencies. Front-month WTI oil futures rallied over 2% to a 13-month high at $60.95. A flaring up in the Yemeni civil war boosted crude prices, in addition to reflation-trade positioning, which is being aided by the ongoing tumble in world-wide positive Covid test results (now one third the January peak), alongside vaccination programs and prospects of big stimulus spending in the U.S. and EU.

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