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By XE Market Analysis June 16, 2020 4:21 am
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    XE Market Analysis: Europe - Jun 16, 2020

    The dollar and yen took a downward shift against most currencies as risk appetite picked back up, catalysed by a Bloomberg News report that the Trump administration is preparing a near $1 tln infrastructure proposal, along with the Fed detailing its corporate bond purchasing program, which it confirmed started yesterday. These developments have been tonic for markets, which have been concerned about a number of coronavirus flare-ups in various places across the globe. Regarding the coronavirus, Beijing reported a drop in the number of new coronavirus cases, to 27 from 36 yesterday, which also fed the rebound in investor spirits. The BoJ, meanwhile, left monetary policy settings unchanged, and stuck to its view that the economy will gradually recover. The injection of optimism saw the MSCI Asia-Pacific stock index rally by over 3% in its largest single-day rise since March 25th. S&P 500 futures gained 1%, extending the 0.8% rise the cash version of the index saw on Wall Street yesterday, and European index futures also pointed higher. Amid this, the narrow trade-weighted USD index tipped lower as the U.S. currency saw some of its safe haven premium unwind. The index posted a five-day low at 96.46. EUR-USD concurrently edged out a five-day peak, at 1.1350. Sterling has been an outperformer, buoyed both by the rally in global stocks (the currency has established a close correlation with risk appetite during the pandemic era) and by yesterday's joint statement by the UK and EU that trade negotiations will be intensified, which is effectively signal of intent that both sides are committed to finding compromises on key sticking points, such as fisheries and 'level playing field' rules. Cable printed a five-day high at 1.2687, and the UK currency also made gains versus the euro and other currencies. The commodity currencies posted gains against the dollar and yen, too, although came off their highs ahead of the London open. Ahead, investors will be keeping a sharp focus on the r-rate of new coronavirus infections as economies continue to reopen.

    [EUR, USD]
    EUR-USD edged out a five-day peak, at 1.1350, as the dollar rotated lower amid a pickup in risk appetite in global markets. The narrow trade-weighted USD index posted a five-day low at 96.46. Risk appetite, and thereby a lower dollar, was sparked by both a Bloomberg News report that the Trump administration is preparing a near $1 tln infrastructure proposal, along with the Fed detailing its corporate bond purchasing program, which it confirmed started yesterday. These developments have been tonic for markets, which have been concerned about a number of coronavirus flare-ups in various places across the globe. Ahead, investors will be keeping a sharp focus on the r-rate of new coronavirus infections as economies continue to reopen.

    [USD, JPY]
    The yen took a downward shift against most currencies as risk appetite picked back up, catalysed by a Bloomberg News report that the Trump administration is preparing a near $1 tln infrastructure proposal, along with the Fed detailing its corporate bond purchasing program, which it confirmed started yesterday. These developments have been tonic for markets, which have been concerned about a number of coronavirus flare-ups in various places across the globe. Regarding the coronavirus, Beijing reported a drop in the number of new coronavirus cases, to 27 from 36 yesterday, which also fed the rebound in investor spirits. The BoJ, meanwhile, left monetary policy settings unchanged, and stuck to its view that the economy will gradually recover. The injection of optimism saw the MSCI Asia-Pacific stock index rally by over 3% in its largest single-day rise since March 25th. Given the richly priced levels of asset markets and risk of a second wave of coronavirus infections, the road ahead from here is likely to be a rocky one. Simply put, we're not likely to see a replay of the strong, two-month-plus rally that equities and other risk assets saw out of the mid-March lows. This may translate into periodic bouts of yen outperformance, driven by safe haven demand.

    [GBP, USD]
    Sterling has been an outperformer, buoyed both by the rally in global stocks (the currency has established a close correlation with risk appetite during the pandemic era) and by yesterday's joint statement by the UK and EU that trade negotiations will be intensified, which is effectively signal of intent that both sides are committed to finding compromises on key sticking points, such as fisheries and 'level playing field' rules. Cable printed a five-day high at 1.2687, and the UK currency also made gains versus the euro and other currencies.

    [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]
    USD-CAD ebbed back to a five-day low at 1.3509, partly on broader softness in the U.S. dollar and partly amid renewed perkiness in the Canadian currency, which has been buoyed by a rally in oil prices. Front-month WTI crude futures lifted to a five-day high at $37.38, which is the culmination of an 8%-plus rally from the low that was seen on Friday. The Fed's commencement of its corporate bond buying program, along with reports that the Trump administration is planning a $1 tln fiscal stimulus program, injected some optimism back into global markets, which in turn led to higher oil prices and higher commodity currencies, including the Canadian dollar. Ahead, and before there is a vaccine or effective treatments of SARS Cov-2, key will be how effectively economies will be in reopening without causing a significant resurgence in coronavirus infections.

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