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By XE Market Analysis June 3, 2020 4:04 am
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    XE Market Analysis: Europe - Jun 03, 2020

    More of the same, with the dollar and yen weakening while commodity currencies lead the outperforming pack as stocks and oil prices, and other industrial commodities, continued to rally. A risk-on cocktail of reopening global economies and expectations for further stimulus measures have been underpinning, which are for now offsetting concerns about U.S.-China tensions and the potentially economically disruptive social order disturbances across America. The narrow trade-weighted USD index fell a further 0.3% in printing a low at 97.37, the lowest level seen since March 13th. EUR-USD concomitantly lifted to a high at 1.1213, which is its loftiest level since March 16th. Cable posted a fresh one-month peak at 1.2612. Yen underperformance floated USD-JPY to a new near-two-month peak at 108.85, despite concurrent dollar losses against other currencies. AUD-JPY continued to be the outperforming cross out of the main dollar pairings and cross rates. The cross gained over 0.7% in pegging a new high at 75.76, its best level since mid January. AUD-USD posted a new high for 2020, at 0.6983, being a level last seen on December 29th last year. USD-CAD etched out a new near-three-month low at 1.3478. Front-month WTI crude prices hit a new three-month peak at $38.17. The MSCI Asia-Pacific equity index rallied to its best levels since March 9th, while the 30-year U.S. T-bond yield lifted to 1.532%, its highest since mid March. Among today's data releases so far, investors overlooked negative GDP figures out of Australia, with April building approvals and final May PMI data painting a picture of a rebounding economy. Final China services and composite PMIs for May, meanwhile, signalled a sharp rebound. As a Reuters article highlights, high-frequency data, such as restaurant bookings and mobility data, are showing significant improvement in many key global economies from the nadir of April.

    [EUR, USD]
    EUR-USD lifted to a high at 1.1213, which is its loftiest level since March 16th. Cable posted a fresh one-month peak at 1.2612. This came as the narrow trade-weighted USD index fell a further 0.3% in printing a low at 97.37, the lowest level seen since March 13th, driven lower as the U.S. currency's safe haven premium continues to unwind amid a backdrop of rallying stock markets. This has maintained EUR-USD buoyancy, despite expectations for the ECB to expand its asset buying program at its policy meeting tomorrow. Recent gains have returned the pair to levels that were prevailing well 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 have the potential to return the dollar's role as a safe haven. One is the simple fact that economies aren't likely to fully recover under virus-containing social distancing rules and with the threat of there being renewed lockdowns. 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]
    Yen underperformance floated USD-JPY to a new near-two-month peak at 108.85, despite concurrent dollar losses against other currencies. AUD-JPY continued to be the outperforming cross out of the main dollar pairings and cross rates amid the current risk-on phase in global markets. The cross gained over 0.7% in pegging a new high at 75.76, its best level since mid January. The yen has now more than shed the safe haven premium that was built up during the worst of the pandemic-era carnage in global markets, amid a risk-on cocktail of reopening global economies and expectations for further stimulus measures have been underpinning. There are risks to the outlook ahead, which have the potential to return safe-haven demand to the yen. While many asset classes have recouped to pre-crisis levels, economies aren't likely to fully recover under social distancing rules and with the threat of there being renewed lockdowns. There is also a risk that bankruptcies will soar once government business and pay support schemes fall away, while U.S.-China tensions could still prove to be disruptive, especially if it spills over to trading relations.

    [GBP, USD]
    Cable posted a fresh one-month peak at 1.2612. The pound has also advanced against the euro and yen over the last week, among other currencies, though has either held steady of lost ground to the commodity currencies today, which have been in outperforming mode amid a risk-on backdrop in global markets. Brexit-related news have given the UK currency a boost this week, 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. 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 (which commenced yesterday) 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 etched out a new near-three-month low at 1.3478, partly on broad weakness in the U.S. dollar and partly on outperformance in the commodity currencies, including the Canadian currency. Front-month WTI crude prices hit a new three-month peak, at $38.17. The outlook for oil prices remains bullish, especially as this is one asset class that remains some way below its pre-pandemic peak. This Thursday's OPEC+ meeting are likely to see the major oil producing nations agree on ongoing reduced production levels beyond the end of the June expiry, for at least one or two months. U.S. production has been slashed as well, as Baker-Hughes data last week reporting the 11th straight week of well closures. Prevailing pricing has rendered many shale mining operations in U.S. as 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 coronavirus infections, oil price risk going forward would appear to be to the upside, which in turn should keep the Canadian dollar and other oil-correlating currencies underpinned.

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