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By XE Market Analysis June 17, 2020 4:22 am
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    XE Market Analysis: Europe - Jun 17, 2020

    The dollar majors have been lacking direction amid a backdrop of global stock markets that have lost upside momentum. Most dollar pairings and cross rates have so far remained comfortably within their respective Tuesday ranges. Stock markets in Asia-Pacific flagged, and while S&P 500 futures were showing a 0.3% gain, as of the early London session, they remained off the highs seen yesterday. News that new coronavirus cases hit record highs in six U.S. states spooked markets to a degree, which comes with Beijing fighting a spike in new cases, which served to offset the impact of the record monthly rebound in May U.S. retail sales data from the April nadir. A combo of rich asset valuations, many of which have returned to pre-pandemic levels, and investor wariness about the risk for a new wave of infections as economies reopen, have fed the skittishness being seen across global equity markets. Geopolitical tensions have also been in the mix, with India reporting 20 of its soldiers had been killed in clashes with the Chinese military at a disputed border area, and news that North Korea rejected a South Korea offer to send special envoys. In currency markets, the narrow trade-weighted USD index lifted back above 97.0, rebounding from the six-day low that was seen yesterday at 96.43, with the dollar finding a modicum of safe haven demand. This saw EUR-USD ebb to a low at 1.1255, dropping from Tuesday's six-day high at 1.1353. Yesterday's low at 1.1228 has so far been left unchallenged. USD-JPY posted a narrow range in the lower 107.00s. Cable managed to edge out a two-day low at 1.2542, extending the correction from yesterday's six-day peak at 1.2688. EUR-GBP concurrently recouped to a peak of 0.8983, extending a rebound from yesterday's one-week low at 0.8909. USD-CAD steadied above Tuesday's a six-day low at 1.3502, which was the culmination of a three-day decline from levels near 1.3700. Front-month WTI crude prices ebbed towards $37.0 after yesterday posting a six-day high at $39.06. News that U.S. crude inventories rose 3% in the latest reporting week helped weigh on oil prices, offsetting the IEA raising of its oil demand estimate for 2020.

    [EUR, USD]
    EUR-USD ebbed to a low at 1.1255, dropping from Tuesday's six-day high at 1.1353. Yesterday's low at 1.1228 has so far been left unchallenged. This came with the narrow trade-weighted USD index lifting back above 97.0, rebounding from the six-day low that was seen yesterday at 96.43, with the dollar finding a modicum of safe haven demand as global stock markets sputtered, losing bullish momentum on news that new coronavirus cases hit record highs in six U.S. states, which comes with Beijing fighting a spike in new cases. The news served to offset the positive vibes that came from the record monthly rebound in May U.S. retail sales data from the April nadir. Market attention will be focused on massive stimulus efforts, both in the U.S. and the Eurozone, and globally, along with reopening economies, which is leading to a strong growth rebound in Q2 and Q3 after the lockdown nadir of March and April. For EUR-USD, which has been trading toward the one-year highs that were seen in early March (near 1.1500), having recovered from the March low at 1.0637, which was the lowest level seen since April 2017, we anticipate limited sustained directional bias in the months ahead, with little divergence seen in either Eurozone versus U.S. growth paths nor ECB versus Fed policies.

    [USD, JPY]
    USD-JPY posted a narrow range in the lower 107.00s. Yen crosses have also seen narrow ranges, lacking direction amid a backdrop of global stock markets that have lost upside momentum. Stock markets in Asia-Pacific flagged, and while S&P 500 futures were showing a 0.3% gain, as of the early London session, they remained off the highs seen yesterday. News that new coronavirus cases hit record highs in six U.S. states spooked markets to a degree, which comes with Beijing fighting a spike in new cases, which served to offset the impact of the record monthly rebound in May U.S. retail sales data from the April nadir. Geopolitical tensions have also been in the mix, with India reporting 20 of its soldiers had been killed in clashes with the Chinese military at a disputed border area, and news that North Korea rejected a South Korea offer to send special envoys. 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 taken a turn lower today as the recent risk-on phase in global markets faded. Cable managed to edge out a two-day low at 1.2542, extending the correction from yesterday's six-day peak at 1.2688. EUR-GBP concurrently recouped to a peak of 0.8983, extending a rebound from yesterday's one-week low at 0.8909. Aside from buoyant global stock markets, the UK currency had recently been underpinned by rekindled momentum in UK-EU trade discussions, which was signalled at Monday's joint statement by the UK and EU following a top-level video conference of leaders, which emphasized that negotiations will be intensified. A Bloomberg report, citing people with "knowledge of the conversation," confirmed that there is a sense that the deadlock in negotiations has been broken. This effectively signals intent on both sides to find compromises on key sticking points, such as fisheries and 'level playing field' rules. This has in turn led markets to unwind some of the Brexit-related discount the pound has been trading with. One key development that market narratives have been picking up on is that Brussels has dropped its former "nothing is agreed until everything is agreed" mantra, with the statement yesterday saying that the two sides are committed to "finding an early understanding on the principles underlying any agreement" (i.e. agree on an deal outline before the details are set). UK Prime Minister Johnson also stated that Brexit negotiations should be completed by the end of July, though the sources cited by Bloomberg suggested that negotiators are aiming for an accord to be reached between August and the EU leaders summit in mid October. The pound, in broad trade-weighted terms, continues to trade at about a 11-12% discount relative to the average levels that were prevailing in the two years price to the vote to leave the EU in June 2016.

    [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 has steadied above Tuesday's a six-day low at 1.3502, which was the culmination of a three-day decline from levels near 1.3700. The Canadian currency has lost support with front-month WTI crude prices ebbing back towards $37.0 after yesterday posting a six-day high at $39.06. News that U.S. crude inventories rose 3% in the latest reporting week helped weigh on oil prices, offsetting the IEA raising of its oil demand estimate for 2020. We anticipate that USD-CAD will be volatile over the coming period. With many asset prices at pre-pandemic levels, concerns about a fresh wave of infections as economies reopen can be expected to dampen commitment to sustained risk-on positioning, setting up scope for setbacks on the long road back to normalcy. This said, societies should now be better able to cope with new infections than was the case back in March, when markets crashed, and there remains grounds for optimism that economic growth will continue to pick-up, although perhaps not to pre-crisis levels until such time there is a vaccination and/or effective treatment.

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