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By XE Market Analysis June 15, 2020 7:19 am
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    XE Market Analysis: Europe - Jun 15, 2020

    The dollar and yen rose and commodity currencies underperformed amid safe haven positioning in global markets. Stock markets in the Asia-Pacific have declined sharply, and S&P 500 futures racked up a loss of nearly 3% at the lows (subsequently retracing to a 2% loss), while oil prices were showing a near 5% at the lows. Front-month WTI crude prices printed a two-week low at $34.36, which is over $6 down on the three-month high that was seen a week ago. Concerns about a second wave of coronavirus infections remain front and centre. Beijing has reported a new cluster of cases, originating from a wholesale food market, forcing the city to enact lockdown measures. Also, the r-rate has been creeping back above 1, indicating an exponential spread, in several states in the U.S. and some areas in Europe. UK shops reopen today, despite the r-rate being back above 1 in some parts of England. In the currency realm, the biggest mover out of the main dollar pairings and cross rates has been the risk-sensitive AUD-USD, which fell by more than 1.1% in posting a 13-day low at 0.6776. AUD-JPY declined by nearly 1%, while NZD-USD and NZD-JPY fell by similar magnitudes. The Canadian dollar and other oil-correlating currencies also rotated lower. This lifted USD-CAD by over 0.7% to a two-week peak at 1.3686. USD-JPY edged out a low at 107.00, which is about 35 pips below Friday's New York closing levels, though the pairing subsequently found its feet, with the dollar itself finding demand as a haven currency. The narrow trade-weighted USD index posted a high at 97.39, though remained shy of the 11-day peak that was seen on Friday at 97.45. EUR-USD concurrently carved out a low at 1.1227, remaining above the 11-day low the pairing saw last week at 1.1212. Sterling's pandemic-era proclivity to underperform during risk-off phases in global markets has once again been on display. Cable posted a two-week low at 1.2455, while the pound concurrently hit a two-week nadir against the euro. The pound managed a bounce after European Commission president von der Leyen said that the EU was ready to intensify trade talks.

    [EUR, USD]
    EUR-USD carved out a low at 1.1227, earlier, though remained above the 11-day low the pairing saw last week at 1.1212. EUR-JPY also declined, with both the dollar and yen seeing a measure of outperformance amid a risk-off backdrop in global markets as investors fret about the risks of a second wave of coronavirus infections. We had been highlighting the risks for setbacks on the long road back to social and economic normalcy across the world. Investors, having driven many asset prices well into pre-pandemic valuations, are now watching the trend in new coronavirus infections, where in some reopened areas it has flared back up. A surge in new cases in the sates of Arizona, New Mexico and Utah, along with an outbreak in Beijing in China, 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 said, the ability to manage any new wave of infections should be a lot better than before.

    [USD, JPY]
    The yen has rallied on a safe have bid as risk aversion once again takes a grip on global markets. Stock markets in the Asia-Pacific have declined sharply, and S&P 500 futures have racked up a loss of nearly 3%, while oil prices have dropped nearly 5%. Front-month WTI crude prices printed a two-week low at $34.36, which is over $6 down on the three-month high that was seen a week ago. Concerns about a second wave of coronavirus infections remain front and centre. Beijing reported dozens of new cases in recent days, all stemming from a wholesale food market. In response, the city has gone into lockdown. Also, the r-rate has been creeping back above 1, indicating an exponential spread, in several states in the U.S. and some areas in Europe. UK shops reopen today, despite the r-rate being back above 1 in some parts of England. USD-JPY edged out a low at 107.00, which is about 35 pips below Friday's New York closing levels, though the pairing subsequently found its feet, with the both the dollar and yen in demand as haven currencies. The more risk-sensitive AUD-JPY cross, on the other hand, dove nearly 1% to two-week lows. More of the same seems likely for now.

    [GBP, USD]
    Sterling's pandemic-era proclivity to underperform during risk-off phases in global markets has once again been on display. Cable posted a two-week low at 1.2455, while the pound concurrently hit a two-week nadir against the euro. EU and UK leaders will video-meet today for high-level talks on trade. The UK has now formally ruled out extending its post-Brexit transition access to the EU's single market and customs union, which ups the ante for both sides. The UK will now be existing the single market on January 1st next year. The risk is that the UK will fail to get what it wants and will leave without a new trade deal with the EU in place, which would shift a large part of UK trade onto net much less favourable WTO terms (which would hit the vehicle manufacturing and agricultural sectors hardest). EU leaders will be represented by the EU council president, and the heads of both the European commission and the European parliament will also attend. Our hunch, with both sides having incentive for compromise, is that a deal will be struck, though negotiations may go down to the wire, in October. The BoE's Monetary Policy Committee reviews policy this week (announcing Thursday). As with the Fed and other central banks, the crisis response is in place and policymakers are now in a wait-and-see mode. This will leave the repo rate at 0.25% and QE totals unchanged. The BoE's cheif economist, Haldane, said recently that policymakers were not "remotely close" to deciding on negative rates, although it is being reviewed as an option. As for the pound, the balance of risks are likely to remain toward the downside for now.

    [USD, CHF]
    EUR-CHF has fallen back over the last week, 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 and other oil-correlating currencies also rotated lower. This lifted USD-CAD by over 0.7% to a two-week peak at 1.3686. Oil prices have dropped nearly 5%, with front-month WTI crude prices printing a two-week low at $34.36, which is over $6 down on the three-month high that was seen a week ago. Fresh outbreaks of coronavirus infections across the globe, from Beijing, parts of Europe, and in a number of states in the U.S. have spooked investors, especially with many asset prices having been pushed to levels that were seen well before the pandemic emerged. We expect both oil prices and the Canadian dollar to remain on a back foot for now.

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