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By XE Market Analysis June 2, 2020 4:02 am
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    XE Market Analysis: Europe - Jun 02, 2020

    The dollar has remained soft with risk sentiment in global markets holding up, albeit with a weakening grip. Wall Street finished with modest gains yesterday, while S&P 500 futures are moderately in the negative, and while Asian markets and European index futures have gained, they are up by only a limited extent. U.S. President Trump is weighing military action and imposing curfews in cities across the country in an effort to quell rioting, while there are glass-half-full market narratives arguing that, with many assets have recouped to pre-pandemic levels, there may be less upside potential with most economies across the world not expected to fully recover until such time there is a vaccine or cure for the coronavirus. Despite the flagging risk-on tone, the narrow trade-weighted edged out a new low, at 97.74, which is the lowest level seen since March 16th. EUR-USD has remained buoyant, but has remained below yesterday's 11-week high at 1.1155. USD-JPY remained in a narrow range in the mid-to-upper reaches of the 107.00s, which has been the case for about two weeks now. Sterling has outperformed on Brexit-related news, with the London Times reporting that the UK government is expected to signal a compromise on fisheries and "level playing field" trade rules if the EU backs off from its "maximalist" demands on regulatory alignment and fishing access, according to unnamed sources. Cable printed a one-month peak at 1.2354, while EUR-GBP fell to an 18-day low at 0.8865. AUD-USD edged out a fresh four-month high, at 0.6813. The RBA did the expected and left monetary policy unchanged at its June review today, maintaining the cash rate at 0.25%, while signalling that "the accommodative approach will be maintained as long as it is required." USD-CAD printed a fresh trend low at 1.3527, the lowest seen since March 9th. The Canadian dollar, like other oil-correlating currencies, remains supported by the ongoing buoyant in oil prices. Front-month WTI futures are within a few cents of the trend peak seen yesterday at $35.89.

    [EUR, USD]
    EUR-USD has remained buoyant, but has remained below yesterday's 11-week high at 1.1155. Ongoing dollar weakness has maintained an underpinning in the parring, with the narrow trade-weighted edging out a new low today, at 97.74, which is the lowest level seen since March 16th. We are increasingly of a bearish view of EUR-USD, anticipating a fresh phase of safe-haven dollar buying. Recent gains have returned the pair to levels that were prevailing ahead of the pandemic crash in March. The focus is now on economic reopenings on both sides of the Atlantic, and globally. There are risks ahead, which may keep the dollar's role as a safe haven in play. Economies aren't likely to fully recover under social distancing rules and with the threat of there being renewed lockdowns (witness South Korea). Also, there is a risk that bankruptcies will soar once government business and pay support schemes fall away. Then there is the issue of deteriorating U.S.-China tensions.

    [USD, JPY]
    USD-JPY remained in a narrow range in the mid-to-upper reaches of the 107.00s, which has been the case for about two weeks now. AUD-JPY, meanwhile, which has been a star performer as markets price-in economic reopening across world economies, printed a fresh three-month-plus high at 73.42. There are risks to the outlook ahead, which have the potential to return safe-haven demand to the yen. Economies aren't likely to fully recover under social distancing rules and with the threat of there being renewed lockdowns (witness South Korea). Also, there is a risk that bankruptcies will soar once government business and pay support schemes fall away.

    [GBP, USD]
    Sterling has outperformed on Brexit-related news, with the London Times reporting that the UK government is expected to signal a compromise on fisheries and "level playing field" trade rules if the EU backs off from its "maximalist" demands on regulatory alignment and fishing access, according to unnamed sources. Cable printed a one-month peak at 1.2354, while EUR-GBP fell to an 18-day low at 0.8865. Bigger picture, the pound has recovered most of the net losses seen during May against the dollar and yen, though remains down by over 1% against the euro from month-go levels. Weakness in May came amid speculation that the BoE is heading for negative rates (and join the ECB's and SNB's club). The next BoE Monetary Policy Committee meeting is on June 17th-18th. We don't expect the central bank 'go negative' at this juncture, based on recent signalling by BoE members, with social and economic reopening domestically, in Europe and across the world, driving a rebound from depressed levels in the UK economy. Much will depend on how successful the reopenings are without sparking a further lockdown. Another pressing issue in the UK is the trade negotiations between the UK and EU, with only one more round left until the UK must decide if it wants to extend its post-Brexit access to the EU's customs union and single market beyond the end of 2020. We see potential for Cable to vault back above 1.3000 should economic reopenings go well and the UK government either makes a deal with the EU or extends its transitory single market membership.

    [USD, CHF]
    The SNB has successfully been putting a cap on the franc, which has seen EUR-CHF in recent weeks skirt along just above the five-year low that was first seen on March 9th at 1.0505 without breaching it. Weekly sight deposit data out of Switzerland has pointed to the extent of SNB franc selling over the pandemic crisis period, which was most acute in March before basing out as global governments and central banks acted with interventions and stimulus packages. A rise in sight deposits (money held by commercial banks) can suggest the francs turning up after being sold by the central bank. The 1.0500 level in EUR-CHF, while not a fixed floor, has clearly been a line in the sand of the SNB. The Swiss central bank has a long history of intervening to either limit of slow the pace of appreciation in its currency, which normally comes during periods of risk aversion in global markets and/or euro underperformance. From 2011 through to 2015, the SNB capped the franc via a 1.2000 floor in EUR-CHF. When the cap was abandoned in January 2015, the franc rallied by 30%, having become unfeasible for the SNB to counter the ECB's expansive monetary policies. A similar circumstance is afoot today, with the ECB maintaining expansive polices following a period of safe haven demand for the franc. In January, the U.S. added Switzerland to its list of currency manipulators. The move seemed a bit harsh given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argued that Switzerland should pursue a more expansive fiscal policy as a remedy.

    [USD, CAD]
    USD-CAD printed a fresh trend low at 1.3527, the lowest seen since March 9th. The Canadian dollar, like other oil-correlating currencies, remains supported by the ongoing buoyant in oil prices. Front-month WTI futures are within a few cents of the trend peak seen yesterday at $35.89. We retain a bearish view of USD-CAD, anticipating a return to levels near 1.3000 in the coming weeks and months. The outlook for oil is still bullish. OPEC+ adherence to planned production cuts is reportedly high, and Russia is reportedly not objecting to the next meeting of the group being brought forward to June 4th (which is a good sign of its compliancy). U.S. output continues to fall amid the forced closure of hundreds of shale wells, with current pricing making such operations unviable. On the demand side, China and India are said to be increasing imports, while fuel use in general has been on the rise as economies emerge from lock down. Bigger picture, as long as the nascent recovery isn't scuttled by a second wave of COVID-19 infections, oil price risk going forward would appear to be to the upside.

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