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By XE Market Analysis May 8, 2020 3:58 am
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    XE Market Analysis: Europe - May 08, 2020

    The dollar and yen have weakened, mostly against the commodity and other currencies with higher beta characteristics. This has come amid rallying stock markets, which are pricing-in a reopening of major economies from virus-containing lockdowns, overlooking dismal data (such as a 6% plunge in Japanese household spending, in data released today, and an expected 16% plunge in U.S. April unemployment, in data released later) as being backward looking. Yesterday's unexpected 8.2% y/y rise in Chinese exports in April, contrary to the median forecast for a 14.1% contraction, was a tonic for investors, while news that the U.S. and China have agreed to strengthen cooperation in trade talks has gone down well, too. In the mix have been solid earnings out of the tech sector, particularly PayPal, reflecting the shift to online shopping in the lockdown era. The narrow trade-weighted USD index (DXY) dropped to a three-day low at 99.71, coming with Fed funds futures discounting negative interest rates in the U.S., and with the 2-year U.S. T-note yield posting a record low yesterday. Dollar weakness lifted EUR-USD to a three-day peak at 1.0855, putting in some distance from the two-week low seen yesterday at 1.0766. Buoyant global stock markets have seen some of the yen's built-in safe-haven premium unwind. While USD-JPY has settled in the mid 106.00s, due to concurrent dollar weakness, EUR-JPY extended its rebound gains from three-and-a-half-year lows for a second day, today reaching a two-day peak of 115.46. AUD-USD and AUD-JPY rallied by a respective 0.9% and 0.8% in posting four-day and one-week highs, at 0.6961 and 69.61. USD-CAD printed an eight-day low at 1.3923, aided by continued buoyancy in oil prices. June WTI crude futures lifted back by about 6%, to levels near $26, after posting a correction low at $22.94 yesterday.

    [EUR, USD]
    Dollar weakness lifted EUR-USD to a three-day peak at 1.0855, putting in some distance from the two-week low seen yesterday at 1.0766, while concurrent yen weakness drove EUR-JPY to a two-day high at 115.46. The euro has in the meantime lost ground to the commodity currencies while holding steady against the pound and other currencies. EUR-USD 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 risk. There is little divergence in central bank policy currently, 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. Europe and the U.S. are now in the early stages of economic reopeing strategies.

    [USD, JPY]
    The yen has continued to soften against the commodity currencies and, to a lesser extent, most other currencies, although concurrent dollar weakness has left USD-JPY on a steady footing. This has come amid rallying stock markets, which are pricing-in a reopening of major economies from virus-containing lockdowns. Markets (at least equity and forex markets) are overlooking dismal data (such as a 6% plunge in Japanese household spending, in data released today, and an expected 16% plunge in U.S. April unemployment, in data released later) as being backward looking. Yesterday's unexpected 8.2% y/y rise in Chinese exports in April, contrary to the median forecast for a 14.1% contraction, was a tonic for investors, while news that the U.S. and China have agreed to strengthen cooperation in trade talks has gone down well, too. This backdrop has seen the some of the yen's built-in safe-haven premium unwind. USD-JPY has been settled in the mid 106.00s, thanks to dollar weakness, while EUR-JPY has extended its rebound gains from three-and-a-half-year lows for a second day, today reaching a two-day peak of 115.46. AUD-USD rallied by nearly 1% to a four-day high at 0.6961. While the U.S. and China are being pragmatic on the trade front, tensions between the two economic superpowers remain tense, with 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 relationsis more than just electoral politics. The U.S., and other Western nations, have been growing uneasy about China's power in multilateral organisations, such as the World Health Organisation and World Bank, feeling a need to reassert itself. Aside from geopolitics, there is also a risk that markets are pricing in a too optimistic view on the potential for a strong rebound. Most economies are unlikely to return to pre-pandemic normality until such time there is a vaccine or a cure for the Covid-19 disease that the coronavirus causes.

    [GBP, USD]
    Cable has settled near the 1.2400 mark after lifting out of a 13-day low at 1.2303 that was seen yesterday in the wake of the BoE policy announcement and press conference. 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, however, with two of the nine member policy committee (Saunders and Haskel) voting for an increase in QE. BoE Governor Bailey followed up in his post-meeting press conference by emphasizing that the central bank is not out of monetary policy ammunition while pledging appropriate policy responses will be taken, going forward. He also said that information about the easing in lockdown measures will be material at the June meeting of the Monetary Policy Committee. Bailey also stated that the BoE will reach it current QE target by July. On a positive note, he said he expects the rebound out of the lockdown-induced recession will be much quicker than the rebound out of the 2008/09 financial crisis. 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 printed an eight-day low at 1.3923, aided by continued buoyancy in oil prices. June WTI crude futures lifted back by about 6%, to levels near $26 after posting a correction low at $22.94 yesterday. Oil prices posted a 29-day high on Wednesday, at $26.08, which marked a 258% rebound from the April-28th low at $10.07, although prices still remain down by over 60% from the January high, and well off the average price that has prevailing in recent years. The massive rotation lower in oil prices, caused by a supply/demand imbalance of historic proportions as a consequence of virus-containing lockdown measures in many global economies, marks a significant deterioration in Canada's terms of trade, given the importance of oil exports to the nation. The 7% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the 4%-plus decline against the euro and near 9% 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. Goldman Sachs is forecasting crude prices at $51 in 2021.

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