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By XE Market Analysis June 9, 2020 3:42 am
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    XE Market Analysis: Europe - Jun 09, 2020

    Yen crosses, led by risk-sensitive AUD-JPY, have come under pressure as the lofty levels -- AUD-JPY posted a 13-month last week while AUD-USD today hit an 11-month peak -- encouraged profit taking. AUD-JPY has dropped by over 1.3% today, while AUD-USD has lost nearly 1%. Yen outperformance, meanwhile, drove USD-JPY to sub-108.00 levels from levels around 109.50 that were seen this time yesterday. Both USD-JPY and EUR-JPY were showing declines of 0.5% and more, as of the early London interbank session. The Canadian dollar and other currencies in the oil-correlating commodity subgroup also came under pressure, although with a lesser magnitude of movement. USD-CAD lifted to a high of 1.3419, setting the pair up for what could be its first up day of June. This extended a rebound from yesterday's three-month low at 1.3354. Front-month WTI crude prices were showing a 1%-plus gain, as of early London trading, though were about $3 down on the three-month high that was seen yesterday, at $40.44. EUR-USD is modestly lower today, despite the narrow trade-weighted USD index nudging slightly lower. With oil prices and many asset prices now trading at levels last week well before the pandemic crisis and consequent lockdowns took hold, there seems to be increasing "be wary" narratives. Credit Suisse, for instance, is not atypical in anticipating that it will take another two years to return to pre-virus levels of GDP. Central bank stimulus may have peaked, too. The Fed is widely expected to leave policy unchanged at its meeting this week. We think further rate cuts into negative territory are off the table, given substantial internal and public opposition for now. Also in the mix today has been news that North Korea cut communication lines with South Korea. Despite the risk-wary price action in currencies, the MSCI Asia-Pacific equity index gained over 1% today in making a three-month peak, which followed the Nasdaq index on Wall Street yesterday hitting a record high.

    [EUR, USD]
    EUR-USD is modestly lower today, despite the narrow trade-weighted USD index nudging slightly lower. The pair has ebbed to a five-day low at 1.1262. A 0.6%-plus drop in EUR-JPY may have weighed on EUR-USD. The recent run lower in the dollar lifted the pair to levels that were prevailing well ahead of the pandemic crash in March. The Fed is widely expected to leave policy unchanged at its meeting this week (announcing tomorrow). We think further rate cuts into negative territory are off the table, given substantial internal and public opposition for now. This could help the dollar find its legs, especially if stock markets correct. The bigger focus remains 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, which means that asset markets, many of which are trading back at levels seen before the pandemic took a grip, could now be ripe for setbacks. Also, there is a risk that bankruptcies will soar once government business and pay support schemes fall away in the coming months. Then there is the issue of deteriorating U.S.-China tensions.

    [USD, JPY]
    Yen crosses, led by risk-sensitive AUD-JPY, have come under pressure as the lofty levels -- AUD-JPY posted a 13-month last week while AUD-USD today hit an 11-month peak -- encouraged profit taking. AUD-JPY has dropped by over 1.3% today. Yen outperformance, meanwhile, drove USD-JPY to sub-108.00 levels from levels around 109.50 that were seen this time yesterday. EUR-JPY was showing a decline over 0.6%, as of the early London interbank session. With oil prices and many asset prices now trading at levels last week well before the pandemic crisis and consequent lockdowns took hold, there seems to be increasing "be wary" narratives. Credit Suisse, for instance, is not atypical in anticipating that it will take another two years to return to pre-virus levels of GDP. Central bank stimulus may have peaked, too. The Fed is widely expected to leave policy unchanged at its meeting this week. We think further rate cuts into negative territory are off the table, given substantial internal and public opposition for now. Also in the mix today has been news that North Korea cut communication lines with South Korea. Despite the risk-wary price action in currencies, the MSCI Asia-Pacific equity index gained over 1% today in making a three-month peak, which followed the Nasdaq index on Wall Street yesterday hitting a record high.

    [GBP, USD]
    The pound has been trading mixed this week. The focus remains on the UK-EU trade negotiation front. The decision by EU fisheries ministers not to change course on their position -- to maintain the "status quo", as the EU's chief negotiator Barnier put it, has "skewed things late in the process," according to a Downing Street source cited by the Guardian. London is frustrated by Barnier's inability, thus far, to convince various member states to look for a compromise. The UK is insisting, not unreasonably, that it will be an independent coastal state, and that there needs to be a new relationship with the EU with regard to fishing, pointing to Norway as a working example. The EU, on the other hand, wants to emulate the common fisheries policy (CFP), under which fishing quotas are agreed at an annual negotiation. This is a major issue for the UK, which ran large in the pro-Brexit campaign. The UK government, for instance, points out that the scheme has led to France having 84% of the cod quota in the English Channel. The EU is now expecting the talks to drag on until October, regardless of whether the UK asks for an extension of its post-Brexit transitory access to the single market (which it has to decide on by July 1st). Unless there is a breakthrough in trade negotiations, the pound's upside potential is likely to remain limited.

    [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 currencies in the oil-correlating commodity subgroup have come under pressure. This saw USD-CAD lift to a high of 1.3419, setting the pair up for what could be its first up-day of June and extending a rebound from yesterday's three-month low at 1.3354. Front-month WTI crude prices were showing a 1%-plus gain, as of early London trading, though were about $3 down on the three-month high that was seen yesterday, at $40.44. The decision by the OPEC+ group to extend prevailing output quota limits for another month has been factored in to oil markets.

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