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By XE Market Analysis June 5, 2020 4:06 am
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    XE Market Analysis: Europe - Jun 05, 2020

    The dollar and yen have resumed a weakening path, while the likes of the Australian and New Zealand dollars have led the outpeforming pack amid a backdrop of resuming risk-on positioning in global markets. The MSCI Asia-Pacific equity index is set to close out today with its biggest one-week rally since 2011. Markets are taking faith that reopening countries are managing to do so without causing a second-wave of coronavirus infections, while monetary and fiscal stimulus courses through major global economies. Reports that OPEC+ has ratified an extension in prevailing quotas for an extra month is also in the mix as a supportive factor for equities and oil-correlating currencies, although this is by now well anticipated. Front-month WTI crude prices have remained buoyant, but off yesterday's three-month peak at $38.18. The May U.S. employment report is up today, and is expected to show a moderation in the sharp rate of job losses, though the report won't tell investors much what they don't already know, in markets that remain somewhat deadened to fine-tuning expectations on data. In forex, the narrow trade-weighted USD index printed a fresh near-three-month low at 96.44, making this the eight consecutive day dollar has made a lower low. EUR-USD concurrently made a near-three-month high at 1.1384. The euro yesterday managed to outperform most of its peers after the ECB's strengthened its PEPP program, which followed confirmation of Germay's EUR 130 bln stimulus package. Euro gains have been a particular boon to EUR-CHF, which is trading at its best levels of the year, above 1.0850. USD-JPY edged out a fresh two-month high, at 109.39, floated by yen underperformance. The biggest movers have been AUD-JPY and NZD-JPY. AUD-JPY posted its highest level since May last year. AUD-USD posted its best levels since last December, at 0.7005.

    [EUR, USD]
    EUR-USD made a near-three-month high at 1.1384. While today's price dynamic has been more a function of dollar weakness, the euro yesterday managed to outperform most of its peers after the ECB's strengthened its PEPP program, which followed confirmation of Germay's EUR 130 bln stimulus package. Euro gain s have been a particular boon to EUR-CHF, which is trading at its best levels of the year, above 1.0850. The narrow trade-weighted USD index printed a fresh near-three-month low at 96.44, making this the eight consecutive day dollar has made a lower low. The weakness largely reflects an unwinding in the dollar's safe-haven premium. The May U.S. employment report is up today, and is expected to show a moderation in the sharp rate of job losses, though the report won't tell investors much what they don't already know, in markets that remain somewhat deadened to fine-tuning expectations on data.

    [USD, JPY]
    USD-JPY edged out a fresh two-month high, at 109.39, floated by yen underperformance. The biggest movers have been AUD-JPY and NZD-JPY. AUD-JPY posted its highest level since May last year. The yen's weakness reflects an unwinding in its safe-haven premium. The MSCI Asia-Pacific equity index is set to close out today with its biggest one-week rally since 2011, with markets taking faith that reopening countries are managing to do so without causing a second-wave of coronavirus infections, while monetary and fiscal stimulus courses through major global economies. Reports that OPEC+ has ratified an extension in prevailing quotas for an extra month is also in the mix as a supportive factor for equities and oil-correlating currencies, although this is by now well anticipated. We have been highlighting outlook risks, 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 (as is starting to look likely)

    [GBP, USD]
    The pound has been in rally mode against the dollar and most of its peers outside the cases for higher beta currencies, such as the Australian dollar. Sterling's pandemic-era proclivity to correlate with global stock market direction has again been in evidence this week. Cable today posted a near-three-month high at 1.2668. A crucial round of trade discussions between the UK and EU has been ongoing this week, being the final round before the July-1st deadline the two sides have set themselves before deciding that the UK can extend its post-Brexit access to the EU's customs union and single market beyond the end of this year. A press conference, or at least a statement, is likely to come later today. Prime Minister Johnson will reportedly meet with European Commission President von der Leyen later this month. The BoE has reportedly warned UK banks to be ready for a no-deal Brexit. The UK government has being playing hardball, saying that it is quite prepared to walk away without a deal, even though this would imperil the majority of UK trade to much-less-favourable WTO terms from January-1st 2021, which is the scenario the BoE is warning about. Last week, officials from both sides said that a deal was looking unlikely, though sources cited by the London Times at the weekend said that the UK was willing to compromise, on the proviso that the EU backs off from its "maximalist" demands on regulatory alignment and fishing access. Our hunch is that the UK will either reach and agreement with the EU, or ask for an extension. If we're right, this would be bullish for the pound, which has factored in the risk of the UK leaving without a deal (the crystallisation of a hard Brexit) in 2021. We would foresee Cable trading back above 1.3000 in this scenario.

    [USD, CHF]
    Recent euro gains have been a boon to EUR-CHF, which is now trading at its best levels of the year, above 1.0850. The SNB had been defending an informal line-in-the-sand at 1.0500 since early March in an effort to limited franc appreciation and, thereby, disinflationary forces on the Swiss economy.

    [USD, CAD]
    The Canadian dollar and other commodity- and oil-correlating currencies have remained underpinned amid the prevailing appetite for risk that has been coursing through global markets. USD-CAD has remained heavy after yesterday printing a three-month low at 1.3468. Reports that OPEC+ has ratified an extension in prevailing quotas for an extra month is in the mix of sentiment-influencers today, although this is by now well anticipated. Front-month WTI crude prices have remained buoyant, but off yesterday's three-month peak at $38.18. Both the U.S. and Canada will release their May employment reports, with expected to paint a dismal picture, although with a markedly diminished rate of job losses versus that seen during April's nadir. We don't anticipate the data having much impact on USD-CAD. 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 underpinned.

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