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By XE Market Analysis June 12, 2020 3:46 am
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    XE Market Analysis: Europe - Jun 12, 2020

    The dollar and yen posted fresh highs against most other currencies, although managed to pare losses as the pre-London session in the Asia-Pacific region progressed, with U.S. equity index futures managing about a 1% rebound after closing sharply lower on Wall Street yesterday. Asian share markets, meanwhile, have been a sea of red, although most of the main indices pared intraday losses, and China's CSI 300 index managed to creep into the black. Oil prices remain soft, with front-month WTI futures dropping to an 11-day low at $34.49, which marked a near 15% correction from the three-month high seen on Monday, at $40.40. Investors, having driven many asset prices well into pre-pandemic valuations, are now fretting about a trending rise in new coronavirus infections in some areas where economic reopening has been ongoing for over a month. A surge in new cases in the sates of Arizona, New Mexico and Utah (up 40% last week versus prior week's levels) are cases in point. With a vaccine and/or effective treatment remaining elusive, the premise for optimism about reopening economies has been based on the r-rate remaining below 1.0 (sub-1 readings indicating a contracting rate of new infections, and above 1 indicating an exponential increase in the rate of new infections). This is now being tested, which is translating into concerns about the possibility for there being another bear phase in markets. Safe haven demand for the U.S. currency lifted the narrow trade-weighted USD index (DXY) lifted to a three-day high at 96.93. EUR-USD concurrently ebbed to a three-day low at 1.1277 before recouping to near net unchanged levels in the lower 1.1300s. The risk-sensitive AUD-USD and AUD-JPY also printed fresh lows before rebounding from lows. Sterling has remained in the underperforming column of currencies, partly due to the continued lack of encouraging signs on the EU-UK trade negotiation front, and partly due to the UK currency's pandemic-era sensitivity to risk-off conditions. Cable printed an eight-day low at 1.2545.

    [EUR, USD]
    EUR-USD concurrently ebbed to a three-day low at 1.1277 before recouping to near net unchanged levels in the lower 1.1300s. Safe haven demand for the U.S. currency drove the pair lower, with the narrow trade-weighted USD index (DXY) lifting to a three-day high at 96.93. EUR-JPY also dipped, with the yen also finding demand for its role as a safe haven currency. We had been highlighting the risks for setbacks on the long road back to social economic normalcy across the world. Investors, having driven many asset prices well into pre-pandemic valuations, are now fretting about a trending rise in new coronavirus infections in some areas where economic reopening has been ongoing for over a month. A surge in new cases in the sates of Arizona, New Mexico and Utah (up 40% last week versus prior week's levels) are cases in point. With a vaccine and/or effective treatment remaining elusive, the premise for optimism about reopening economies has been based on the r-rate remaining below 1.0 (sub-1 readings indicating a contracting rate of new infections, and above 1 indicating an exponential increase in the rate of new infections). This is now being tested, which is translating into concerns about the possibility for there being another bear phase in markets, which in turn would drive dollar outperformance.

    [USD, JPY]
    The yen posted fresh highs against most other currencies, although managed to pare losses as the pre-London session in the Asia-Pacific region progressed, with U.S. equity index futures managing about a 1% rebound after closing sharply lower on Wall Street yesterday. Asian share markets, meanwhile, have been a sea of red, although most of the main indices pared intraday losses, and China's CSI 300 index managed to creep into the black. Oil prices remain soft, with front-month WTI futures dropping to an 11-day low at $34.49, which marked a near 15% correction from the three-month high seen on Monday, at $40.40. Investors, having driven many asset prices well into pre-pandemic valuations, are now fretting about a trending rise in new coronavirus infections in some areas where economic reopening has been ongoing for over a month. A surge in new cases in the sates of Arizona, New Mexico and Utah (up 40% last week versus prior week's levels) are cases in point. With a vaccine and/or effective treatment remaining elusive, the premise for optimism about reopening economies has been based on the r-rate remaining below 1.0 (sub-1 readings indicating a contracting rate of new infections, and above 1 indicating an exponential increase in the rate of new infections). This is now being tested, which is translating into concerns about the possibility for there being another bear phase in markets, which would generate demand for the yen.

    [GBP, USD]
    Sterling has remained in the underperforming column of currencies, partly due to the continued lack of encouraging signs on the EU-UK trade negotiation front, and partly due to the UK currency's pandemic-era sensitivity to risk-off conditions. Cable printed an eight-day low at 1.2545.

    [USD, CHF]
    EUR-CHF has fallen back in recent sessions, though has continued to trade comfortably above the series of lows near 1.0500 that were seen from March through to mid May. Committed SNB intervention prevented the 1.0500 level from being breached over this period, when the consequences of the pandemic increasing bets about a possible breakup of the euro area, and even the EU. However, since the Franco-German backed EU recovery fund gained traction in mid May, these bets have gone sour, which led to a rebound in EUR-CHF. The recovery fund is up for ratification at the June 18th-19th EU summit. Assuming this passes, as looks likely (though its form still remains unclear), this should keep EUR-CHF supported for a while. Further out, the Swiss economy will likely be better able to recover from the pandemic era than the eurozone economy. Along with Swtizerland's massive current account surplus, these are factors that suggest upside potential for EUR-CHF will be limited, regardless of the SNB's desire for weaker franc.

    [USD, CAD]
    The Canadian dollar has come under pressure, like other commodity and oil-correlating currencies, amid the backdrop of tumbling stock markets, which are correcting from lofty levels amid nascent signs of a second wave of coronavirus infections in some areas where economic reopening has been ongoing for a month or more. Oil prices remain soft, with front-month WTI futures dropping to an 11-day low at $34.49 today, which marked a near 15% correction from the three-month high seen on Monday, at $40.40. USD-CAD posted an 11-day high at 1.3666. A return to levels above 1.4000 looks likely, assuming the correction in global stocks, oil and other industrial commodity markets, continues.

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