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By XE Market Analysis March 26, 2021 5:34 am
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    XE Market Analysis: Europe - Mar 26, 2021

    The dollar bloc currencies returned to the outperforming lane amid a rebound in global stock markets. Oil and base metal prices also rose. The MSCI Asia-Pacific equity index rallied 1.5% after posting a three-month low yesterday, and U.S. stock index futures were showing gains of over 0.3% as of the early London session. Data yesterday showing a one-year low in jobless claims, coupled with the rollout of stimulus in the U.S. and some good news on the vaccine distribution front helped restore a more positive sentiment, offsetting the more worrisome situation Europe. Some narratives have also been noting that the flaring up in tensions between the West and Chain have resulted in only symbolic sanctions so far, that won't in themselves disrupt trade between the two. Against this backdrop, the Australian and New Zealand dollars rallied over 0.5%, while the Canadian dollar gained by over 0.3% against the greenback. The biggest loser has been the yen, which fits the currency's correlative pattern with global risk appetite. USD-JPY edged out a nine-month high at 109.44. EUR-JPY lifted, though remained below yesterday's peak, while AUD-JPY and GBP-JPY both pegged three-day highs, and CAD-JPY a four-day high. Elsewhere, the DXY dollar index settled lower after yesterday punching out a four-month high at 92.92. EUR-USD found a toehold after yesterday seeing a fresh four-month low at 1.1761. The euro, while firmer in the case against the yen and dollar, lost ground to the pound and dollar bloc currencies, amongst others. The disappointing vaccine rollout on continental Europe, renewed lockdown measures in large eurozone countries, and the most negative interest rates in the world (ex-Switzerland) are keeping the euro in the underperforming column. EUR-GBP dropped back to within 15 pips of 13-month lows, EUR-CAD saw an eight-day low and came within 5 pips of one-year low territory, and EUR-AUD hit a three-day low. Cable, meanwhile, posted a three-day high at 1.3774. Month- and quarter-end flows have been, and will remain in the mix into next week, including the end of Japan's financial year. The pronounced divergence between stock market gains and bond market losses over Q1 has resulted in an usually large need, by the standards of recent years, for for major investment managers to rebalance their portfolios to maintain weightings in the different asset classes, which typically maintain a 60/40 ratio between stocks and bonds. This has been a factor behind recent stock market weakness and decline in sovereign yields.

    [EUR, USD]
    We remain bearish on EUR-USD. The ECB this month surprised markets by announcing a ramp up in its asset purchase program in an effort to dampen rising yields. Markets are also focusing on growth and yield differentials, and the U.S. economy is widely seen outpacing the Eurozone and other peers this year, thanks in large part to the massive upcoming fiscal spending spree. Eurozone interest rates are near the most negative in the world (barring Swiss rates), and there is little expectation for the ECB to tighten policy, contrasting to the debate about the Fed, and the possibility it may be forced to tighten sooner than expected.

    [USD, JPY]
    The yen has been underperforming today, fitting its correlative pattern with global risk appetite, with stock markets rebounding from recent weakness. USD-JPY edged out a nine-month high at 109.44. EUR-JPY lifted, though remained below yesterday's peak, while AUD-JPY and GBP-JPY both pegged three-day highs, and CAD-JPY a four-day peak. We anticipate more pronouncement yen weakness on the other side of month end, which coincides with the end of Japan's financial year end, on the the proviso that the global reflation trade continues, which we expect (despite the disappointing vaccine rollout in the EU and rise in tensions between the West and China). Month- and quarter-end flows have been, and will remain in the mix into next week. The pronounced divergence between stock market gains and bond market losses over Q1 has resulted in an usually large need, by the standards of recent years, for for major investment managers to rebalance their portfolios to maintain weightings in the different asset classes, which typically maintain a 60/40 ratio between stocks and bonds.

    [GBP, USD]
    Cable posted a three-day high at 1.3774. The pound also rose against the euro and yen, though lost ground to the dollar bloc and other cyclical currencies today amid a rebound in global stock and commodity markets. BoE Chief Economist Haldane said yesterda that he expects a "rip-roaring" recovery in the UK, with consumers chomping at the bit to spend lockdown savings. This week's preliminary March PMI survey data, which smashed expectations, found businesses reporting that an increase in consumer demand in anticipated of societal reopening and spring and summer was already under way. The UK vaccination status, alongside the rate of Covid infection and mortalities, remain encouraging, though there is some evidence of new outbreaks in some areas as a consequence of schools reopening. There are concerns about the emergence of new variants that will render existing vaccinations obsolete, or at least less effective, which is the reason behind the UK government's draconian decision to make it illegal for its citizens to take foreign holidays in the months ahead. Overall, we remain bullish on the pound, on the proviso that the global pandemic recovery trade remains intact as the year progresses.

    [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]
    The Canadian dollar has lifted against the U.S. dollar, euro and yen, among other currencies, with exception of its dollar bloc peers and other cyclical, commodity-correlating currencies. USD-CAD dropped to the mid 1.2500s, pulling back from yesterday's 16-day high at 1.2630. Oil prices have rebounded by over 2% today, which comes amid what has been the biggest correction in over five months, and which has been recently weighing on the Canadian dollar and other oil correlating currencies. We expect oil prices to remain soft, given the demand destruction being caused by the re-implementation of lockdown measures across much of Europe. We had been noting waning upside momentum in the the bullish oil price trend, with prices having become quite lofty, having long since been re-established to pre-pandemic level norms, while global demand has continued to lag behind pre-Covid levels. The OPEC+ group have maintained tight quotas through to April, though the discipline is looking increasingly likely to falter, with Russia in particular chomping at the bit to increase supply. U.S. shale production will also continue to ramp higher, despite some hindrances imposed by the Biden administration.

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