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By XE Market Analysis May 1, 2020 4:49 am
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    XE Market Analysis: Europe - May 01, 2020

    The commodity currencies have come under pressure after U.S. President Trump soured the mood in equity markets, raising his accusations against China about the coronavirus outbreak, threatening new tariffs while, according to an unnamed source connected to the White House cited by Bloomberg, considering blocking a government fund -- the Thrift Savings Plan (which is the federal government's retirement savings fund -- from investing in Chinese equities. Sources cited by Reuters said that a range of options against China were being discussed, but considerations were at an early stage. The S&P 500 closed on Wall Street yesterday with a 0.9% decline, which capped out the best month the index has seen since 1987 as shares rebounded from the deep declines that were seen in March. Trading in S&P 500 futures have seen losses accelerate, racking up declines of over 2% so far in the overnight session. Trading conditions have been thinned by the absence of Singapore, China and Hong Kong, which have been closed today for Labour Day holidays, and with many European countries also taking the day off. Final PMI survey data out of Japan and Australia reaffirmed the dismal economic picture due to the lockdowns. The biggest mover out of the main currencies has been the Australian dollar, which dropped nearly 1% in posting a three-day low at 0.6446 against the U.S. dollar. The Kiwi dollar also came under pressure, while USD-CAD lifted by over 0.6% in printing a three-day high at 1.4027, despite oil prices rising to a two-week high. Elsewhere, EUR-USD has been rooting in the mid 1.09s, holding below yesterday's 16-day at 1.0937. USD-JPY has been holding a narrow range in the lower 107.0s. Sterling has come under pressure, giving back gains seen yesterday. The UK currency has been correlating with global equity market direction, similar to a commodity currency, over the last couple of months.

    [EUR, USD]
    EUR-USD has been rooted in the mid 1.09s, holding below yesterday's 16-day at 1.0937. The high was a product of a broad rotation low in the dollar, which has been under pressure over the last week amid an improving risk appetite in global markets, underpinned by the prospect of reopening economies. Sentiment has soured over the last day, however, with President Trump ramping up his campaign against China and allegations of its role in the coronavirus epidemic, which in turn has returned some support to the dollar. The ECB yesterday left the overall policy framework unchanged at the conclusion of its monthly policy meeting, but announced further liquidity-boosting measures: specifically a 25 bps cut of targetted long-term refinancing operations, known as TLTROs III, and the creation of a non-targetted pandemic emergency long-term refinancing operations, known as PELTROs. The move was a little more than markets had anticipated, which consequently weighed on the euro, though the common currency quickly bounced back against the dollar and other currencies. Obviously the same lockdown-related economic headwinds are bearing down on the U.S. and other countries, limiting the divergence in central bank policy and scope for directional currency gyrations. For this reason the deluge of data out of the Eurozone yesterday had little impact, which included worse than expected German jobless total in April, a 3.8% contraction in Eurozone Q1 GDP, and a slightly less benign reading in April Eurozone HICP inflation (though still falling to a 0.4% y/y rate from 0.7% y/y in March). Incoming U.S. data has been painting a similar picture. EUR-USD looks likely to continue to lack a clear directional bias, though risks seem to be skewed to the downside given the political stresses within the EU.

    [USD, JPY]
    USD-JPY has been holding a narrow range in the lower 107.0s. The yen, meanwhile, has gained versus the underperforming commodity currencies today, which have come under pressure after U.S. President Trump soured the mood in equity markets by escalating his accusations against China about the coronavirus outbreak, including threatening new tariffs. Japan's final April manufacturing PMI confirmed a fall to 41.9 from 44.8 in the month prior, which is the lowest level seen since April 2009. The BoJ released the minutes from its policy meeting, held on Monday, which didn't offer too much insight, noting, for instance, that the damage from the pandemic could be "enormous." The BoJ this week delivered on expectations in announcing that JGB purchases can now be unlimited (formerly capped at Y80 tln per year) while also announcing an increase in corporate bond and commercial paper. The yen wasn't impacted, with the move largely symbolic as the central bank's 0% target on the 10-year JGB was being met without the need for unlimited purchases. With the global rate of coronavirus infection in decline, global stock market sentiment has been buoyed by the commencement of a phased reopening in major economies, which should keep the yen on a steady-to-softening track.

    [GBP, USD]
    Sterling has come under some pressure today, giving back gains seen yesterday. The UK currency has been correlating with global equity market direction, similar to a commodity currency, over the last couple of months. Cable shed about 0.5% in posting a low at 1.2535, which retraces about half of yesterday's gain. We have been arguing that with many economies reopening, or heading for reopening, that the worst looks to be over for the pound, which underperformed during the more acute risk-off phases over the last couple of months, although the continued risk for the UK leaving the post-Brexit transition membership of the EU's single market at the end of the year is likely to curtail upside potential. The pound remains down on the year-to-date by an averaged 5% versus the dollar, euro and yen.

    [USD, CHF]
    The SNB has successfully been putting a cap on the franc, which has seen EUR-CHF in recent weeks skirt along just above the five-year low that was first seen on March 9th at 1.0505 without breaching it. Weekly sight deposit data out of Switzerland has pointed to the extent of SNB franc selling over the pandemic crisis period, which was most acute in March before basing out as global governments and central banks acted with interventions and stimulus packages. A rise in sight deposits (money held by commercial banks) can suggest the francs turning up after being sold by the central bank. Total sight deposits rose by CHF 28.6 bln over the last four weeks, at a diminishing rate (rising by just 3 bln in the last week, through to April 16th) as the demand for the Swiss currency as a safe haven tapered off. The 1.0500 level in EUR-CHF, while not a fixed floor, has clearly been a line in the sand of the SNB. The Swiss central bank has a long history of intervening to either limit of slow the pace of appreciation in its currency, which normally comes during periods of risk aversion in global markets and/or euro underperformance. From 2011 through to 2015, the SNB capped the franc via a 1.2000 floor in EUR-CHF. When the cap was abandoned in January 2015, the franc rallied by 30%, having become unfeasible for the SNB to counter the ECB's expansive monetary policies. A similar circumstance is afoot today, with the ECB maintaining expansive polices following a period of safe haven demand for the franc. In January, the U.S. added Switzerland to its list of currency manipulators. The move seemed a bit harsh given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argued that Switzerland should pursue a more expansive fiscal policy as a remedy.

    [USD, CAD]
    USD-CAD lifted by over 0.6% in printing a three-day high at 1.4027, despite oil prices rising to a two-week high. This comes with the Canadian dollar following other commodity currencies lower today, after U.S. President Trump soured the mood on global equity markets by ratcheting up his accusations against China about the coronavirus pandemic, though we expect the Canadian dollar's correlative break from oil prices to be temporary (or, indeed, oil price break with global stock markets). June WTI crude future posted a two-week high at $20.45, though has since ebbed back under $20. While oil prices have doubled in less than a week, prices remain down by about 70% from the highs seen in early January, which marks a significant deterioration in Canada's terms of trade.

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