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By XE Market Analysis June 29, 2020 5:08 am
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    XE Market Analysis: Europe - Jun 29, 2020

    The dollar has traded mostly softer so far today. Asian stock markets have tumbled, though U.S. equity index futures have posted moderate gains, rebounding a little after closing quite sharply in the red on Wall Street on Friday. The yen concurrently traded with a neutral-to-softer bias, despite the risk-off backdrop in regional equity markets, which were largely viewed as a catch-up trade to the drop in North American markets on Friday. Weekend news showed a continuing vault higher in new coronavirus cases in the U.S., which is forcing some states to reconsider their reopening plans. New Zealand prime minister, Ardern, also said that it is "untenable" to open up borders at this time. More positively, a candidate vaccine being developed China received special military drug approval after passing clinical trials. Among the main currencies, EUR-USD floated to a five-day peak at 1.1267 as the narrow trade-weighted USD index ebbed to a five-day low at 97.15, which is near the halfway point of last week's range. USD-JPY edged out an intraday low at 107.38, with the pair remaining well within its Friday range. EUR-JPY lifted to a six-day high. AUD-JPY gained modestly, but remained within its Friday low and high. USD-CAD declined moderately, to a 1.3645 low, remaining above Friday's nadir at 1.3625. Front-month WTI crude futures fell over 2% to a four-day low at $37.52. Ahead this week, the calendar is busy across the globe with May and June economic data, which are likely to further evidence the strong rebound from the April lockdown trough. The data may be somewhat overlooked by markets with primary focus falling on the infection rate of the coronavirus, amid worries of double-dip recession, or at least a post-rebound growth slump. Note that U.S. markets will close on Friday for the Independence Day holiday.

    [EUR, USD]
    EUR-USD floated to a five-day peak at 1.1267 as the narrow trade-weighted USD index ebbed to a five-day low at 97.15, which is near the halfway point of last week's range. The rebound follows a decline from last Tuesday's two-week high at 1.1350. The calendar this week is busy across the globe with May and June economic data, which are likely to further evidence the strong rebound from the April lockdown trough. The data may be somewhat overlooked by markets with primary focus falling on the infection rate of the coronavirus, amid worries of double-dip recession, or at least a post-rebound growth slump. Note that U.S. markets will close on Friday for the Independence Day holiday. Markets are trapped in a constant state of tweaking risk premia, which for EUR-USD means downside pressure when the dollar gains on safe haven demand, and upside pressure when things are looking more rosy. 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.

    [USD, JPY]
    The yen has been trading with a neutral-to-softer bias, despite the risk-off backdrop in regional equity markets, which were largely viewed as a catch-up trade to the drop in North American markets on Friday. Weekend news showed a continuing vault higher in new coronavirus cases in the U.S., which is forcing some states to reconsider their reopening plans. New Zealand prime minister, Ardern, also said that it is "untenable" to open up borders at this time. More positively, a candidate vaccine being developed China received special military drug approval after passing clinical trials. USD-JPY edged out an intraday low at 107.38, with the pair remaining well within its Friday range. EUR-JPY lifted to a six-day high. AUD-JPY gained modestly, but remained within its Friday low and high. Shifting risk premia has continued to influence the Japanese currency's safe haven premium, which is likely to remain a primary driver of direction for the currency. 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.

    [GBP, USD]
    Cable has found a footing in the mid 1.2300s after last week tumbling from the mid 1.2500s, which culminated late Friday with a one-month low at 1.2312. EUR-GBP, meanwhile, has printed a fresh three-month high, at 0.9104, making this the fourth consecutive week of higher weekly highs. A combo of the upcoming EU recovery fund, which is being greeted a euro positive by most analysts, and the market perception that the BoE is unwinding monetary stimulus prematurely, has been underpinning EUR-GBP. We continue to expect the pound to remain apt to underperformance in the weeks ahead, assuming there won't either be a significant breakthrough in UK-EU trade talks, nor a walk back in the BoE's apparent tapering in QE. The UK economy looks to be in a vulnerable position, too. The risk of a narrow trade agreement, or no trade agreement at all, with the EU remains very much on the cards at a time when it's becoming apparent that a V-shaped recovery from the pandemic lockdown is going to more likely resemble an "L" shape, at least for a good while (scientists at Oxford University, which is among the leaders in the pack of researchers developing candidate vaccines, say that a vaccine is not likely to be ready for global rollout until the latter portion of 2021). This is not an ideal combo for an open economy with a large currency account deficit. We expect this backdrop to translate into a weak pound, even though the currency is already running at about a 11-12% trade-weighted discount compared to the average levels in the several years preceding the vote to leave the EU in June 2016. Stocks of UK companies that derive the majority of their revenue domestically will also be apt to underperform, while stocks of larger-cap corporations, which in the UK are highly international entities, will likely hold their own relative to global peers. Triple A rated Gilts should continue to remain a safe haven asset for investors, though ratings agencies are monitoring the endgame of Brexit carefully. The next round of trade talks are due in July, though October will -- as the EU's chief Brexit negotiator Bernier said last week -- be "the real moment of truth."

    [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]
    USD-CAD declined moderately, to a 1.3645 low, putting in some distance from the four-week high that was seen on Friday at 1.3716, though remaining above Friday's nadir at 1.3625. Front-month WTI crude futures fell over 2% to a four-day low at $37.52, though have so far remained above last week's lows near $37.0. Recent USD-CAD gains were fed by combo of U.S. dollar outperformance and underperformance in the Canadian currency, which is a higher beta currency, sensitive to shifting sentiment in global markets. While May-June economic data are mostly beating expectations as global economies rebound from the April lockdown nadir, concerns are running high that a new wave in coronavirus infections will crimp growth potential in the months ahead. For USD-CAD, we are bullish at this juncture. The June-1st high at 1.3802 provides and upside waypoint.

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