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By XE Market Analysis May 7, 2020 3:56 am
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    XE Market Analysis: Europe - May 07, 2020

    The commodity currencies have traded firmer, boosted by an unexpectedly good trade report out of China, which reported a 8.2% y/y rise in exports, contrary to the median forecast for a 14.1% contraction. The data helped Asian stock markets pare intraday losses, offsetting fresh volleys of anti-China rhetoric from U.S. President Trump and his Secretary of State, Pompeo (Trump focusing on trade, Pompeo on the coronavirus pandemic). AUD-USD rose over 0.6% in posting a high at 0.6450, which is 4 pips shy of yesterday's peak. The Kiwi dollar also gained, although by a lesser degree, as did the Canadian dollar, despite softer oil prices today. USD-CAD, after posting a two-week high at 1.4163, ebbed back under 1.4100. June WTI crude futures posted a two-day low near $23.50, correcting after scaling to a three-week high yesterday. The dollar pared gains. The narrow traded-weighted USD index (DXY) dipped under 100.10 after earlier edging out a 10-day high at 100.23. EUR-USD plied a narrow range, basing at 1.0786, which is 4 pips above the 13-day low seen yesterday at 1.0782. USD-JPY posted a sub-35 pip range, basing at 106.00, holding just above yesterday's seven-week low at 105.98. Elsewhere, the pound has lifted moderately following the BoE's policy announcement, with Governor Baily saying that he expects the recovery from the lockdown to be much more rapid than from the global financial crisis of 2008/9. The BoE left its policy framework unchanged following its May MPC meeting, as was widely anticipated with the central bank having already responded to the consequences of the pandemic crisis. There was dovish dissension in the ranks, with two of the nine member policy committee (Saunders and Haskel) voting for an increase in QE. Growth and inflation forecasts were slashed in the BoE's quarterly Monetary Policy Report.

    [EUR, USD]
    EUR-USD plied a narrow range, basing at 1.0786, which is 4 pips above the 13-day low seen yesterday at 1.0782. The pair continues to trade 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, though the somewhat frayed politics of the eurozone tips the balance toward downside. There is little divergence in central bank policy, with both the ECB and the Fed are pursuing aggressive easing policies, with both Europe and the U.S. facing significant economic headwinds from virus-containing lockdown measures. Both Europe and the U.S. are also now pursing economic reopeing strategies, too.

    [USD, JPY]
    USD-JPY has posted a sub-35 pip range, basing at 106.00, holding just above yesterday's seven-week low at 105.98, and EUR-JPY has found a footing after dropping sharply in recent sessions, which yesterday left a three-and-a-half-year low at 114.43. The Japanese currency has also softened against the commodity currencies following an expected 8.2% y/y rise in Chinese exports in April, contrary to the median forecast for a 14.1% contraction, which lifted stock markets in Asia. The Chinese data offset a fresh volleys of anti-China rhetoric from U.S. President Trump and his Secretary of State, Pompeo (Trump focusing on trade, Pompeo on the coronavirus pandemic). Going forward, we expect the Japanese currency to remain apt to outperformance, partly on the view that stock markets may have been factoring in an overly optimistic impact from phased economic reopening, and partly due to the Trump administration ratcheting up its accusations against China about the origin of 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 economic superpowers is more than just electoral politics. The U.S., and other Western nations, have growing uneasy about China's power in multilateral organisations, such as the World Health Organisation and World Bank, feeling a need to reassert itself. The pandemic, coupled with the rapidly deteriorating tensions between the U.S. and China, is likely to be disruptive for global markets, which should in turn maintain safe-haven demand for the yen.

    [GBP, USD]
    The pound has lifted moderately following the BoE's policy announcement, with Governor Baily saying that he expects the recovery from the lockdown to be much more rapid than from the global financial crisis of 2008/9. Cable lifted to a high at 1.2418 after earlier printing a 13-day low at 1.2310. The BoE left is policy framework unchanged following its May MPC meeting, as was widely anticipated with the central bank having already responded to the consequences of the pandemic crisis. There was dovish dissension in the ranks, with two of the nine member policy committee (Saunders and Haskel) voting for an increase in QE. Growth and inflation forecasts were slashed in the BoE's quarterly Monetary Policy Report. The pound has developed a distinct pandemic era characteristic of correlating closely with global stock market direction (i.e. risk appetite), similar to a high beta commodity currency. While Cable is up by about 8.5% from the 35-year low seen in mid March, the pair remains down by about 6.5% on the year-to-date, and is the first time since the 1980s that the pound has consistently traded below 1.3000. UK Prime Minister Johnson will on Sunday detail the first phase of reopening in the UK, having been in lockdown since March 23rd, which will start on Monday.

    [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, after posting a two-week high at 1.4163, ebbed back under 1.4100. Softer oil prices had been weighing on the Canadian dollar before unexpectedly good trade report out of China, which reported a 8.2% y/y rise in exports, contrary to the median forecast for a 14.1% contraction, catalysed a about of risk appetite, which lifted the Loonie and other commodity currencies. June WTI crude futures posted a two-day low near $23.50, correcting after scaling to a three-week high yesterday. Crude prices remain up by over 230% from the low seen near $10 on April 28th, though prices still remain down by over 74% from the highs seen in January. Goldman Sachs research this week raised its 2021 oil price forecast to $51. The 8.5% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the 4%-plus decline against the euro and near 10% drop versus the yen, reflects the pricing-in of this reality (the erosion in Canada's terms of trade) 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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