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By XE Market Analysis May 11, 2020 4:31 am
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    XE Market Analysis: Europe - May 11, 2020

    The yen has continued to weaken and commodity currencies strengthen amid a backdrop of mostly buoyant stock markets in Asia-Pacific, though risk-on sentiment has been flagging during the PM session in the region. Countries from Japan and New Zealand, to France and the UK, are loosening lockdown rules, though South Korea warned of a second wave of infections, cases in the U.S. appear to be rising, while Wuhan in China has reported five new Covic-19 cases, the highest since March 11. The PBoC stated it will use "more powerful" policies to support the economy, while the BoJ's "Summary of Opinions" from its late-April policy meeting noted a consensus concern about downside risks to the prospects of economic recovery. There seems good reason for markets, having been pricing-in a phased reopening from lockdown across global economies, to pause at some point, to wait-and-see how the loosening-up process goes. For now, though, the dial has remained on the risk-on side of the scale. Yen underperformance, reflecting an unwinding in the Japanese currency's safe haven premium, saw USD-JPY lift by 0.5% in printing a one-week high at 107.14, returning the pair to the upper part of the range that's been prevailing over the last couple of weeks. The commodity currencies, meanwhile, have continued to outperform. AUD-USD posted an 11-day high at 0.6561, which is 10 pips shy of the two-month high that was seen in late April. AUD-JPY rallied by over 0.7% in pegging an 11-day high at 70.18, with the cross only needing to break above here to put it in two-month territory. USD-CAD posted an 11-day low at 1.3901. Oil prices are moderately softer today, consolidating off the one-month highs seen last week. EUR-USD and Cable have been trading steadily so far today. Note that the UK and EU will commence with the next round of trade talks today.

    [EUR, USD]
    EUR-USD has been plying a narrow range in the mid 1.0800s, while yen weakness drove EUR-JPY into six-day high territory. The euro has, meanwhile, lost ground to the outperforming commodity currencies today, while continuing to hold 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 reopening strategies.

    [USD, JPY]
    The yen has continued to weaken and commodity currencies strengthen amid a backdrop of mostly buoyant stock markets in Asia-Pacific, though risk-on sentiment has been flagging during the PM session in the region. Countries from Japan and New Zealand, to France and the UK, are loosening lockdown rules, though South Korea warned of a second wave of infections, cases in the U.S. appear to be rising, while Wuhan in China has reported five new Covic-19 cases, the highest since March 11. The PBoC stated it will use "more powerful" policies to support the economy, while the BoJ's "Summary of Opinions" from its late-April policy meeting noted a consensus concern about downside risks to the prospects of economic recovery. There seems good reason for markets, having been pricing-in a phased reopening from lockdown across global economies, to pause at some point, to wait-and-see how the loosening-up process goes. Should such a theme evolve, this would underpin the yen. Another concern is the deterioration in relations between the U.S. and other Western nations and China. While the U.S. and China are so far taking a pragmatic stance on trade, 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 suggest that the White House is considering taking a number of measures against China, including the possibility of tariffs. Trump motives for blaming China are not just that he faces a presidential election in six months; the fraying relations is more than just electoral politics. The U.S. has 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]
    Sterling has become apt to correlate with global stock market direction do far in the era of the pandemic crisis. The UK has proved vulnerable to the pandemic, economically due to the nation's open economy, current account deficit, and outsized financial sector, and in terms on contagion, as a consequence the massive international hub that is London, which served as a gateway for the coronavirus to spread throughout the UK. The UK currently has just over 219k confirmed cases, which is the fourth highest national total in the world (after the U.S., Spain and Russia), and the second highest Covid-19 deaths (at nearly 32k). Despite the high totals, reported cases are now in decline and the UK has today commenced its first baby-step to reopening its economy, with non-essential manufacturing now reopening. The UK and EU will commence with the next round of trade talks today. The British government has continued to insist that there will be no delay in the UK's end-of-year departure from its Brexit transition membership of the EU's customs union and single market. The UK has until July 1st to commit to this, so the pressure is on negotiators. Markets will continue to factor in a risk that the UK leaves the EU at the end of the year without a new trade deal, as many analysts see there is insufficient time to negotiate a new deal, even though the two sides are starting from perfect equivalence. Leaving the single market (which includes 40 free trade deals with global economies) without a new deal would mean a large portion of the UK's trade would switch to much less favourable WTO terms and conditions.

    [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 posted an 11-day low at 1.3901. Oil prices are moderately softer today, consolidating off the one-month highs seen last week. June WTI oil prices last week posted a 29-day high at $26.08, which marked a 258% rebound from the April-28th low at $10.07. 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. There is a risk of setbacks, in the event that reopenings cause a significant second wave of infections.

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