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By XE Market Analysis February 22, 2021 4:18 am
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    XE Market Analysis: Europe - Feb 22, 2021

    Shifting yield differentials have continued to drive currency direction. At the 10-year maturity level, Australian yields have, for instance, risen more over the last week than most peers, which has driven the Aussie dollar to fresh trend highs against most currencies. UK yields have also been among those showing the biggest basis point rise, even more than U.S. Treasuries over the last week, which has seen the pound clock a new major trend high against the dollar today. The dollar still managed to subsequently rebound against the dollar bloc and pound, while posting gains against most other currencies. Global stock markets have continued to exhibit a sputtering price action near highs, though the reflation trade has remained strong in commodity markets, with copper prices hitting new 10-year highs and other base metals also seeing new multi-year highs. Rising yields shouldn't in themselves pose a threat to the reflation trade, assuming Covid cases continues to fall, the vaccination program works and global economies reopen, allowing stimulus and the presumed spending of 'lockdown savings' to take full effect. Rising interest rates and yields go hand in hand with major equity bull markets, and improving corporate profits should enable stocks to be carried higher. Research by SocGen highlighted the consensus expectation for earnings to rise 30% in 2021 for companies in the MSCI World Index, and by 40% in emerging markets. In currency markets today, EUR-USD ebbed to the lower 1.2100s, remaining comfortably above its Friday lows. Yen underperformance, which has been a consequence of JGB yields conspicuously lagging a long way behind the steep yield rises of others -- the 10-year JGB yield differential over the 10-year Australian benchmark yield, for instance, is down over 30 bp from week-ago levels -- lifted USD-JPY above its Friday high and to peak so far today at 105.77. AUD-JPY printed a 26-month high, and EUR-JPY lifted towards the 26-month high the cross saw last week, while GBP-JPY clocked a new 23-month high. AUD-USD traded above 0.7900 for the first time since March 2018, while NZD-USD posted a 35-month high. USD-CAD posted a 35-month low at 1.2579. The greenback managed a rebound against all three of the dollar bloc currencies. Cable pegged a new 34-month high, this time at 1.4052 before correcting to the upper 1.3900s. The pound also edged out an 11-month high against the euro, and a 23-month versus the yen, though has fared less robustly in the case against the dollar bloc. Bitcoin clocked fresh record highs in what is either a major bubble or major coming-of-age rally.

    [EUR, USD]
    EUR-USD ebbed to the lower 1.2100s, remaining comfortably above its Friday lows. Further declines seem more likely than gains at this juncture. U.S. Treasury yields have been rising faster than Bund yields, while Eurozone nations are likely to lag behind the U.S. and UK in reopening due to the relative pace in Covid vaccination programs.

    [USD, JPY]
    Yen underperformance, which has been a consequence of JGB yields conspicuously lagging a long way behind the steep yield rises of others -- the 10-year JGB yield differential over the 10-year Australian benchmark yield is down over 30 bp from week-ago levels, for instance -- lifted USD-JPY above its Friday high on route to a peak so far today at 105.77. AUD-JPY printed a 26-month high, and EUR-JPY lifted towards the 26-month high the cross saw last week, while GBP-JPY clocked a new 23-month high. More of the same, in terms of trend, seems likely.

    [GBP, USD]
    The pound has remained overall buoyant. UK yields have also been among those showing the biggest basis point rise, even more than U.S. Treasuries over the last week, which has seen Cable peg a new 34-month high, this time at 1.4052 before correcting to the upper 1.3900s. The pound also edged out an 11-month high against the euro, and a 23-month versus the yen, though has fared less robustly in the case against the dollar bloc. The UK's ahead-of-the-pack Covid vaccine program has been giving the undervalued pound an underpinning. With the UK nations still enduring lockdown measures, Prime Minister Johnson will later today outline a roadmap to lifting Covid restrictions, which are expected to by a cautious step-by-step approach. Vaccinations, and evidence that the program is proving effective, alongside a build up in natural herd immunity (from those having recovered from a Covid infection) and seasonal factors bode well for reopening prospects. A sharp focus will remain on the various new, highly transmissible variants, though so far these evidently haven't prevented a sharp worldwide drop in new cases, including in areas and countries will loose restrictions. The UK economy and the pound underperformed peers during the height of the first lockdowns last year, and the vista of reopening is having the opposite effect.

    [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 posted a 35-month low at 1.2579. The Canadian dollar also hit a fresh one-year high versus the yen and a five-month peak in the case against the euro. Oil prices have lifted out of the correction lows that were seen on Friday. Front-month WTI oil futures nearly retraced Friday's decline in posting a intraday high at $60.18. The 13-month high that was seen last Thursday is at $62.26, though oil prices still remain up by nearly 23% on the year to date, which markets a substantial improvement the terms of trade of the Canadian economy. 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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