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By XE Market Analysis May 6, 2020 3:55 am
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    XE Market Analysis: Europe - May 06, 2020

    Currencies have been plying overall narrow ranges so far today against a backdrop of mostly buoyant global stock markets and a fresh three-week high in oil prices, with investors anticipating a lift in demand as economies reopen from lockdowns. Chinese markets reopened from the extended May Day holiday, while Japanese markets remained closed (reopening tomorrow). The narrow trade-weighted USD index has settled just off the eight-day high seen yesterday at 99.97. EUR-USD edged out an eight-day low at 1.0817, marking a third consecutive lower low. Yesterday's German constitutional court ruling that some of the measures the Bundesbank is taking under the ECB's Public Sector Purchase Program are not covered by EU law, has weighed on the euro (although, crucially, refraining from ruling that the ECB's asset purchase program violate its mandate). USD-JPY edged out a fresh seven-week low, at 106.21, while EUR-JPY posted a three-year low at 115.06, reflecting increment yen gains, despite the prevailing optimism in global stock markets. The Australian and New Zealand dollars outperformed, albeit marginally, with both remaining below their respective highs versus the dollar from yesterday. The RBNZ warned about the consequences of the global lockdowns, though to little impact on the Kiwi. New Zealand Q1 employment data beat forecasts, rising 0.7% q/q versus the median forecast for a 0.2% contraction, though the data largely precedes the New Zealand lockdown. Data out of China encouraged, showing sales of heavy trucks rose 50% in April, marking a 52% y/y increase, rebounding strongly after sales contracted by 16% in Q1. Figures also showed a 60% rise in customer flows over the May Day holiday weekend, even though restrictions haven't fully been lifted and spending remains consequently impacted. The SNB's intervening actions have not been going unnoticed. An FT article cited analyst concerns about the ballooning SNB balance sheet, which is a consequence of its intervention to cap franc strength by buying foreign currencies, and which risks the credibility of the central bank.

    [EUR, USD]
    EUR-USD edged out an eight-day low at 1.0817, marking a third consecutive lower low. Yesterday's German constitutional court ruling that some of the measures the Bundesbank is taking under the ECB's Public Sector Purchase Program are not covered by EU law, has weighed on the euro (although, crucially, refraining from ruling that the ECB's asset purchase program violate its mandate). EUR-USD is trading 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 edged out a fresh seven-week low, at 106.21, while EUR-JPY posted a three-year low at 115.06, reflecting increment yen gains, despite the prevailing optimism in global stock markets. Tokyo markets remained closed for Japan's Golden Week holidays, and will reopen tomorrow. 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 steady today after trading mixed over the last day, gaining on the underperforming euro, losing ground to the commodity currencies while settling at near net unchanged levels against the dollar. Cable has been holding a narrow range, centred around 1.2450, which is near to midway levels of the broadly sideways consolidation range the pair has been seeing since early April. The release of final UK PMI survey data yesterday out was of no consequence. Despite the final composite PMI being unexpectedly revised higher, to a reading of 13.8 from the preliminary estimate of 12.9, this is of course not something to be greeted with joy as the revised outcome still marks, by far, a record low since the series started in 1998, having plunged from 36.0 in March and from a reading above 50.0 in February. 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 economic and financial 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. The UK government is reviewing the UK's lockdown this week, and a decision on whether to commence a phased reopening will be made on Thursday (or possibly Sunday, according to some reports).

    [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 has ebbed to the lower 1.40s, though has so far remained above yesterday's five-day low at 1.4006. The Canadian currency, along with other oil-correlating currencies, has been underpinned a continued rise in oil pricers. June WTI crude futures posted a fresh three-week high at $24.55, marking a gain of over 240% from the low seen on April 28th, though prices still remain down by over 72% from the highs seen in January. Goldman Sachs research this week raised its 2021 oil price forecast to $51. The 8% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the near 4% 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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