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By XE Market Analysis June 25, 2020 4:33 am
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    XE Market Analysis: Europe - Jun 25, 2020

    The dollar has lifted amid a backdrop of tumbling stock markets across the Asia-Pacific region, and with U.S. equity index futures extending lower following the negative close on Wall Street yesterday. Markets in Hong Kong and mainland China have been closed today. Surging coronavirus cases, and related hospitalizations, in the U.S, along with problematic workplace clusters of new infections in many reopening economies, have continued to weigh on investor spirits amid a reality check on the scope for economic recovery while the world remains without a vaccine or effective treatment of Covid-19. News that the governors of New York, New Jersey and Connecticut ordered travellers from eight other states to quarantine on arrival was a particularly sharp reality check, while the Texas governor describe a "massive outbreak" and the likelihood of new lockdown measures. Australia also posted its biggest daily rise in new coronavirus cases since April. Amid this, the IMF downwardly revised its 2020 global GDP forecast to -4.9%, down from the 3% contraction envisaged in April. Australian airline Qantas announced it is laying off a fifth of its workforce, stating that it doesn't expect sizeable international operations until at least July 2021. The Trump administration also expended its list of European goods that qualify of tariffs. Amid all this, the narrow trade-weighted USD index (DXY) edged out a a three-day high at 97.33, while EUR-USD concurrently ebbed to a three-day low, at 1.1237, putting in some further distance from the nine-day peak that was seen at 1.1350 on Tuesday. USD-JPY lifted modestly, enough to see the pair carve out an eight-day high at 107.26. AUD-USD posted a three-day low at 0.6852. NZD-USD extended declines seen yesterday following the RBNZ's dovish policy guidance, printing a three-day low just under 64 cents. With oil prices down, the Canadian dollar and other oil-correlators traded softer. This floated USD-CAD to a 10-day peak at 1.3660. Front-month WTI crude prices fell by over 1% in making a one-week low at $37.48, extending the correction from Tuesday's 16-week high at $41.63.

    [EUR, USD]
    EUR-USD has printed to a three-day low at 1.1214, driven by another phase of dollar strength, which has come amid a backdrop of wobbling stock markets, which in Europe largely gave back intraday gains. News of a new ECB Eurosystem repo facility to provide euro liquidity to central banks outside the Eurozone seemed to give stock markets a boost after a negative session in Asia, though evidently not enough to offset concerns about surging coronavirus cases in the U.S. and problematic workplace clusters of new infections in many reopening economies. Markets are trapped in in a constant state of tweaking risk premia, which for EUR-USD means downside pressure when the dollar gains on safe haven demand. The EU's proposed EUR 750 bln multiannual financial framework fund has continued to be taken as a positive step in analysts commentaries -- being a hinge factor of bullish euro calls at Morgan Stanley and Citi, for instance. Morgan Stanley analysts argued that the EU proposal means that some of the risk premium for EU break-up risk will abate, and that the creation of a new large and liquid, higher-yielding AAA asset will attract inflows from real money investors and reserve managers. The team at MS is forecasting EUR-USD at 1.2000 by Q2 next year. We take a slightly more circumspect view given the risks of setbacks on the road back to economic normalcy, which likely won't be achieved until such time there is a vaccine or effective treatment for the SARS Cov-2 coronavirus, which in turn should keep the dollar prone to bouts of outperformance. EUR-USD has rotated lower since making a three-month high at 1.1423 on June 10th. The high marked an incursion toward the one-year highs that were seen in early March (near 1.1500), having recovered from the March low at 1.0637 (the lowest level seen since April 2017).

    [USD, JPY]
    USD-JPY lifted modestly, enough to see the pair carve out an eight-day high at 107.26. Japanese corporate demand helped given the pair an underpinning, while yen traded neutrally against even the Australian dollar and other higher beta currencies, despite the backdrop of tumbling stock markets. The BoJ yesterday released its Summary of Opinions document from the June policy meeting, which was of limited interest to markets given that the minutes have long since been released. While the BoJ remains committed to uber stimulus, the central bank is no longer unique in this regard, and so has been having little weakening impact on the Japanese currency relative to peers. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the yen has built up a reputation as a safe haven currency. This is likely to remain a principal driver of the currency, especially against high beta currencies, such as the Australian dollar and other commodity-correlating currencies. Market participants are grappling with glass-half-empty and glass-half-full arguments. There are signs of new waves of coronavirus infections as economies reopen, which has already seen social restrictions being re-introduced in some places (such as Beijing and in California), although the overall trend remains to de-restriction. Geopolitical issues remain wildcards, although, on the U.S.-China front, its pretty clear that President Trump values his trade deal with Beijing five months out from the presidential election. On the glass "half full" side, there is the expectation that the massive stimulus by global central banks is primed to give risk assets a major boost, which in the event would likely see the Japanese currency underperform.

    [GBP, USD]
    Sterling has managed a modest rebound today. EUR-GBP has dipped back to the lower 0.9000s after yesterday failing to close in on the three-month peak that was was seen earlier in the week at 0.9082. A combo of the upcoming EU recovery fund and the market perception that the BoE is unwinding monetary stimulus prematurely, had been giving EUR-GBP. We continue to expect the pound to remain apt to underperformance in the weeks ahead, assuming there won't be a significant breakthrough in UK-EU trade talks, nor a walk back in the BoE's apparent tapering in QE. The BoE's raising of its QE program by GBP 100 bln last week, and statement that purchases would be complete by year-end, works out (adding the existing purchase schedule plus with the new 100 bln schedule) at a GBP 6.6 bln tapering in gilt purchases per week. Although this represents a tightening in monetary policy, markets are viewing it as sterling negative given the perceived risk to growth in the pandemic era. Also, BoE Governor Bailey indicated in a Bloomberg Opinion article on Monday that the QE total would be reduced before hiking interest rates, which marks a reversal of course from his predecessor, Carney. Overall, markets are taking this as the BoE giving forward guidance on unwinding stimulus, and viewing this in such febrile times, and with the Fed and ECB maintaining "will do what ever it takes" guidance, as being a negative for the currency, especially with the Brexit endgame remaining uncertain.

    [USD, CHF]
    EUR-CHF has fallen back over the last couple of weeks, 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 current EU summit, which concludes tomorrow. 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. Regarding the SNB, the central bank left policy settings unchanged at its quarterly review last week, reaffirming that aggressive intervention will remain the main tool to fight the impact of the coronavirus pandemic on the franc. SNB chief Jordan stressed that the currency remains "highly valued" and repeated that the central bank will continue to sell it as needed. The SNB is now forecasting a contraction in economic activity of 6% this year, the most severe recession since the 1970. The SNB also trimmed inflation forecasts, though it is pretty clear that policymakers are reluctant to go below the current level of -0.75% for the key policy rate. Negative for longer remained Swiss policymakers' central policy guidance.

    [USD, CAD]
    The Canadian dollar and other oil-correlators traded softer, concomitantly with weaker crude prices. This floated USD-CAD to a 10-day peak at 1.3660. Front-month WTI oil futures fell by over 1% in making a one-week low at $37.48, extending the correction from Tuesday's 16-week high at $41.63. Oil prices are likely to remain the principal driver of Canadian dollar direction. Bullish momentum in crude markets has been waning, despite the recent fresh highs. Markets have gone some way in pricing-in reopening global economies, and the associated demand stimulus things is bringing, although prices remain some way below pre-crisis levels (WTI benchmark prices averaged about $60 in the year to early March). Supply still remains tight, with the OPEC+ group maintaining reduced output quotas and with relatively cost intensive U.S. production continuing to slide. For USD-CAD, we anticipate that the balance of risks remains to the downside, though this assumes that global economies are able to keep a lid on new coronavirus inflections until such time there is a vaccine or effective treatment of the SARS Cov-2 virus. This view is being somewhat stretched at present, with the U.S. reporting a sharp rise in the rate of new coronavirus cases. This view also assumes that the OPEC+ group will maintain discipline over supply quotas.

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