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By XE Market Analysis February 19, 2021 4:45 am
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    XE Market Analysis: Europe - Feb 19, 2021

    The dollar has softened for a second consecutive day, despite U.S. Treasury yields perking up, although remaining off trend highs seen earlier in the week. Global stock markets have continued to exhibit a sputtering price action in the face of historically stretched valuations and the recent spike in yields. In the commodity realm, oil prices have corrected while base metals have remained buoyant, with copper and nickel, for instance, posting fresh major trend highs. The DXY dollar index posted a two-day low at 90.51, which marks a little over a 50% retrace of the gains that were seen on Tuesday and Wednesday. EUR-USD concurrently rose above 1.2100 for the first time since Wednesday. USD-JPY dropped for a third straight day, posting a three-day low at 105.53. The yen traded softer against most other currencies. Cable scratched out a fresh 34-month high at 1.3989, while the pound traded softer against the euro, correcting after rising against the common currency on each day over the last week, which produced an 11-month peak yesterday. There was unusual divergence among the dollar bloc, with the Australian dollar outperforming the main currencies today while the Canadian dollar has underperformed. This saw the AUD-CAD cross lift over 0.5% in pegging a six-week high at 0.9896, which is less than 10 pips from 32-month high terrain. AUD-USD lifted by nearly 0.5% in making a three-day high at 0.7798, while AUD-JPY came within a whisker of 26-month high territory. USD-CAD, meanwhile, held with its Thursday range, while the Canadian dollar weakened against the euro and yen, among other currencies, although remaining just above loss seen yesterday for the most part. Weaker oil prices affected the loonie and other oil correlating currencies. Front-month WTI oil futures dove over 2.5% in posting a one-week low at $58.59. Crude is down over 5% from the 13-month high that was seen yesterday at $62.26. We had been arguing that oil prices were due a correction, despite all the talk of a return to $100, given that prices are firmly back into pre-pandemic levels and with global demand is likely to take a considerable time to fully recover to pre-Covid levels, alongside the fact that U.S. supply is set to ramp higher. Elsewhere, bitcoin is holding firm on dips, aided by Elon Musk asserting that bitcoin "is simply a less dumb form of liquidity than cash." Given bitcoin notorious volatility, lack of liquidity (try trying to get a remotely good fill when selling bitcoin during a sharp correction), and hefty transaction costs it's hard to see just how at the current juncture.

    [EUR, USD]
    EUR-USD rose above 1.2100 for the first time since Wednesday. The euro has also managed to lift against the pound for the first time a week, lifting out of 11-month lows. Sentiment is somewhat convoluted, with global equity markets having come of highs while commodities have rallied, which is a theme that is persisting for a second day. U.S. Treasury yields remained settled off recent highs. The dollar recently re-established a correlative link with Treasury yields, and specifically the differentials between Bund yields and other peers. The magnitude of the recent sharp spike in U.S. yields became too much to ignore for market participants, even allowing for the relatively high inflation rate in the U.S. relative to the Eurozone and other peers (which has a depressing effect on real yield differentials). The 10-year T-note yield printed highs above 1.30% earlier in the week, which is nearly 40 bp up on the prevailing yield at the end of 2020. The upcoming massive $1.9 tln fiscal spending spree in the U.S. is naturally causing markets to consider inflationary consequences and the associated possibility of the Fed being forced to tighten policy sooner than is generally being considered, despite the Fed's pledge to let inflation run higher in this cycle than it would have normally done. The FOMC minutes to the January 26-27 meeting, released earlier this week, reaffirmed that the Fed will remain in ultra accommodative mode given worries over downside economic risks and willingness to look beyond inflation spikes. But, recent hotter than expected data (including retail sales, production, and PPI), coupled with the likes of Goldman Sachs rising their U.S. GDP forecasts, the question is how long the Fed can continue with its new policy rubric, especially when the stimulus starts impacting an economy reopening from pandemic restrictions, and as and when consumers unleash some of their lockdown savings. As for the Eurozone, societal reopening may lag the U.S. and UK due to slow rollout of Covid vaccines. Overall, this presents a bearish backdrop for EUR-USD.

    [USD, JPY]
    USD-JPY dropped for a third straight day, posting a three-day low at 105.53. The yen traded softer against most other currencies, with AUD-JPY came within a whisker of 26-month high territory. USD-JPY still remains up by just over 2.5% on the year-to-date, corresponding with the pronounced widening in U.S. Treasury over JGB yield differentials, which in the case of the 10-year benchmarks has been more than 35bp over this period.

    [GBP, USD]
    Cable has made the most out of a softer dollar environment, and lifted above 1.4000 for the first time since April 2018. At the same time the pound traded softer against the euro, correcting after rising against the common currency on each day over the last week, which produced an 11-month peak yesterday. The UK currency has been outperforming moderately on the the year so far, when the UK completed Brexit by leaving its transition membership of the EU's common market and customs union. News earlier this week that the UK government reached, ahead of schedule, its target to vaccinate the most vulnerable groups to Covid have given markets reason to be bullish on sterling, 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. Prime Minister Johnson will be laying out a road map for reopening next Monday. This should keep the pound broadly underpinned.

    [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 has held with its Thursday range, while the Canadian dollar weakened against the euro and yen, among other currencies, although remaining just above loss seen yesterday for the most part. Weaker oil prices affected the loonie and other oil correlating currencies. Front-month WTI oil futures dove over 2.5% in posting a one-week low at $58.59. Crude is down over 5% from the 13-month high that was seen yesterday at $62.26. We had been arguing that oil prices were due a correction, despite all the talk of a return to $100, given that prices are firmly back into pre-pandemic levels and with global demand is likely to take a considerable time to fully recover to pre-Covid levels, alongside the fact that U.S. supply is set to ramp higher.

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