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By XE Market Analysis March 1, 2021 4:28 am
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    XE Market Analysis: Europe - Mar 01, 2021

    The dollar has corrected some of Friday's gains amid a recovery in risk appetite in global markets, which has come as bond yields retreated. The DXY dollar index has posted a low at 90.69, down from Friday's 11-day high at 90.97, while EUR-USD concurrently lifted to a high of 1.2101, up almost 40 pips from the 11-day low that was seen on Friday. Despite the generally softer tone of the dollar, yen underperformance floated USD-JPY, which tested Friday's seven-month high at 106.70. Yen crosses traded firmer, too, which recouped some of the lost ground that was seen during the heightened spate of risk-off positioning last week. The Japanese currency has recently been trading at major trend lows against most currencies thanks to the relatively rooted JGB yields, which has seen differentials versus other sovereign yields tip markedly out of the currency's favour. The biggest movers so far today have been the Australian and New Zealand dollars, which outperformed after underperforming markedly last week. AUD-USD gained over 0.7% in posting a high at 0.7774, recovering a portion of the sharp, more than 3-big-figure loss that was seen at the tail end of last week. USD-CAD dropped to a 1.2673 low, down nearly 80 pips from Friday's peak at 1.2751, aided by a 2%-plus rise in oil prides. Front-month WTI futures posted a high at $62.92, up over $1.50 from Friday's low but remaining comfortably below the 13-month peak that was seen last Thursday, at $63.81. The pound has traded mixed, gaining on the dollar, euro and yen, but losing ground against the dollar bloc. Cable posted a high at 1.3999 before settling nearer 1.3950, which is still well up on Friday's low at 1.3887. In news, the House of Representatives passed the Democrats $1.9 tln stimulus package at the weekend, as expected. The stage is set for a hand off from monetary stimulus to fiscal stimulus, which is likely to the source of ongoing indigestion in bond markets, although the prospect for stronger corporate earnings should still carry stocks higher, especially cyclicals (growth stocks, such as tech, will be more sensitive to the erosion in the present value of future expected cash flows in a rising rate environment). The UK government, which is preparing its annual budget (to be presented this Wednesday), signalled that the prospect of a strong growth rebound is limiting the need for large tax rises.

    [EUR, USD]
    EUR-USD lifted to a high of 1.2101, up almost 40 pips from the 11-day low that was seen on Friday. A weaker dollar has lifted the pair, which has come amid an improvement in risk appetite in global markets as bond yields settled lower. EUR-JPY also gain, though the euro lost ground to the pound and dollar bloc currencies. Bigger picture, the reflation trade, which we assume will continue to unfold as the year progresses, should prove to be a dollar negative, although the massive level of domestic stimulus in the U.S. may curtail the currency's downside potential more than it would have otherwise have been. The stimulus may force the Fed to tighten monetary sooner than it would have otherwise would, while the high level of domestic economic stimulus will also attract foreign capital investment.

    [USD, JPY]
    Despite the generally softer tone of the dollar, yen underperformance floated USD-JPY, which tested Friday's seven-month high at 106.70. Yen crosses traded firmer, too, which recouped some of the lost ground that was seen during the heightened spate of risk-off positioning last week. The Japanese currency has recently been trading at major trend lows against most currencies thanks to the relatively rooted JGB yields, which has seen differentials versus other sovereign yields tip markedly out of the currency's favour.

    [GBP, USD]
    The pound has traded mixed, gaining on the dollar, euro and yen, but losing ground against the dollar bloc. Cable posted a high at 1.3999 before settling nearer 1.3950, which is still well up on Friday's low at 1.3887. The UK government, which is preparing its annual budget (to be presented this Wednesday), signalled that the prospect of a strong growth rebound is limiting the need for large tax rises. The speedy rollout of Covid vaccinations has been attributed to the brightening outlook for the UK economy, and recent outperformance in the pound.

    [USD, CHF]
    Policymakers at the SNB retain a chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

    [USD, CAD]
    USD-CAD dropped to a 1.2673 low, down nearly 80 pips from Friday's peak at 1.2751, aided by a 2%-plus rise in oil prides. Front-month WTI futures posted a high at $62.92, up over $1.50 from Friday's low but remaining comfortably below the 13-month peak that was seen last Thursday, at $63.81.

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