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By XE Market Analysis May 5, 2020 3:53 am
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    XE Market Analysis: Europe - May 05, 2020

    The dollar ebbed back a little while the commodity currencies lifted moderately as stock markets mustered up gains. Many economies are already in or heading to a phased reopening from lockdowns, while there was a lack of follow-through (so far) on U.S. President Trump's threats against China about the coronavirus. Both Japanese and Chinese remain closed for public holidays. EUR-USD has held a narrow range around 1.0900, and USD-JPY has put in a sub-30 pip range in the mid 106.0s.
    AUD-USD lifted above its Monday high in making a peak at 0.6462. The RBA left its cash rate unchanged at 0.25%, as had been widely anticipated, while loosening the minimum criteria for purchases of corporate debt under its QE program, which will now include debt rated to BBB-. Weekly jobs data out of Australian was down 7.5%. New Zealand reported no new coronavirus cases for a second day, reaffirming the success both New Zealand and Australian have had in containing the virus, which has prompted talk of a free travel policy between the two nations.
    USD-CAD dropped below Monday's low in making a low at 1.4029, with the Canadian dollar advancing for the first time since last Wednesday. The Canadian currency, along with other oil-correlating units benefited by June WTI crude futures rising 8% in pegging a three-week high at $22.09. Goldman Sachs research raised its 2021 oil price forecast to $51. There is a large body of analysts anticipating a rebound in oil prices, partly on the view that depleting storage capacity is forcing producers into sizeable output cuts.
    Switzerland's April CPI data showed a precipitous drop, to -1.1% y/y from -0.5% y/y. The plunge in oil prices and pronounced disinflationary impact of Europe-wide and world-wide lockdowns are at work, though the SNB will also worry about the disinflationary impact stemming from the chronically overvalued Swiss franc, which the central bank has been capping via an informal 1.0500 floor in EUR-CHF during the pandemic crisis period so far.
    UK government minister Hancock reaffirmed the government's position that, in his words, there is "no need" to delay trade discussions with the EU, with the intention of the UK leaving transition membership of the EU's single market at year-end.

    [EUR, USD]
    EUR-USD has held a narrow range around 1.0900, consolidating lower after rising out of the April-24th low at 1.0726. The pair remains to the south of the halfway mark of the volatile range that was seen during the height of global market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. We expect EUR-USD to lack sustained directional bias for now. Both the ECB and the Fed are pursuing aggressive easing policies, both Europe and the U.S. are facing significant economic headwinds from virus-containing lockdown measures, and both Europe and the U.S. are now pursing economic reopeing strategies.

    [USD, JPY]
    USD-JPY has put in a sub-30 pip range in the mid 106.0s, while the yen has lost ground to the commodity currencies today against a backdrop of buoyant global stock markets. Japanese markets are closed this week for Japan's Golden Week holiday. We expect the Japanese currency to remain apt to outperformance should the Trump administration follow-through in its threats to take actions with regard to its accusations against China and the coronavirus pandemic. Reports last week suggested that the White House is considering taking a number of measures against China, including new tariffs. It should be obvious that Trump motives for blaming China are high six-months out from a presidential election, though the fraying relations between the two biggest economies is a real concern for investors.

    [GBP, USD]
    Sterling is steadier today after coming under some pressure over the previous couple of sessions. The UK currency has been correlating with global equity market direction, similar to a commodity currency, over the last couple of months. The BoE's May Monetary Policy Committee meeting is up this week (announcing Thursday), which will be accompanied by its quarterly Inflation Report. The central bank has already slashed its policy repo interest rate to near zero while expanding its QE programme and putting in liquidity measures in response to the financial market consequences of the pandemic-forced economic lockdown. As with the Fed and ECB last week, this policy meeting isn't likely to be too eventful, with the policy framework expected to be left unchanged for now. Large reductions in the central bank's growth and inflation forecasts can taken as a given in the Inflation Report. Data this week is highlighted by the by the release of the final April versions of the services and composite PMI readings (today), along with the April construction PMI report (Wednesday). The UK's final April manufacturing PMI was released last Friday, and was revised lower to 32.6 from 32.9, tumbling from 47.8 in March. The UK's lockdown is set to last through to next Thursday, when the government will make a second review. It's uncertain as yet if a phased reopening of the economy will be announced, though the five criteria the government has listed as necessary to be met (flattening in the infection rate, ability of the health system to cope, increased diagnostic testing capacity etc) look to be nearly achieved.

    [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. 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 dropped below Monday's low in making a low at 1.4029, with the Canadian dollar advancing for the first time since last Wednesday. The Canadian currency, along with other oil-correlating units benefited by June WTI crude futures rising 8% in pegging a three-week high at $22.09. Goldman Sachs research raised its 2021 oil price forecast to $51. Oil prices remain down by over two thirds from the highs seen in early January, marking a significant deterioration in Canada's terms of trade. The near 9% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the near 6% decline against the euro and near 10% drop versus the yen, reflects the pricing-in of this reality in currency markets. Going forward, focus is on economies that are reopening from virus-containing lockdowns, and how successful, extensive and durable this proves to be. This should rekindle demand for oil and other commodities, which should in turn put in an underpinning for the Canada's currency.

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