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By XE Market Analysis May 13, 2020 3:35 am
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    XE Market Analysis: Europe - May 13, 2020

    The dollar has remained heavy, although having lifted out of its lows yesterday. Amid concerns about a second wave of coronavirus infections as economies reopen, and with disinflationary pressures taking a grip, and U.S. money markets pricing in the negative interest rates, the pressure is mounting on the Fed, which has been weighing on the dollar. USD-JPY has edged out a two-day low at 107.09, extending the correction from the 20-day high that was seen on Monday at 107.78. EUR-USD has been entrenched in a narrow range near 1.0850, holding below yesterday's eight-day high at 1.0885. Commodity currencies have been stable today after coming under pressure yesterday. Stock markets in the Asia-Pacific region started off negatively before paring losses during their afternoon sessions. S&P 500 futures managed to lift out of the red, and were showing a 0.3% gain as of the early London morning. AUD-USD has been settled in the mid-to-upper 0.6400s, holding above yesterday's six-day low at 0.6431. USD-CAD edged out a six-day high at 1.4085, driven by moderate underperformance in the Canadian dollar, which has come with oil prices turning softer after seeing one-month highs yesterday. Market attention is now on today's speech by Fed chair Powell (from 09:00 ET/13:00 GMT). We expect him to dismiss the view that rates will be eased below zero by the end of the year, a stance he's indicated several times of late. His colleague Bullard yesterday dismissed negative interest rates, arguing that an expansion in QE would be a better policy option, if needed.

    [EUR, USD]
    EUR-USD has been entrenched in a narrow range near 1.0850, holding below yesterday's eight-day high at 1.0885. The high was a product of dollar weakness. Amid concerns about a second wave of coronavirus infections as economies reopen, and with disinflationary pressures taking a grip, and U.S. money markets pricing in the negative interest rates, the pressure is mounting on the Fed, which has been weighing on the dollar. The spotlight is now on today's speech by Fed chair Powell (from 09:00 ET/13:00 GMT). We expect him to dismiss the view that rates will be eased below zero by the end of the year, a stance he's indicated several times of late. His colleague Bullard yesterday dismissed negative interest rates, arguing that an expansion in QE would be a better policy option, if needed. 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, 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]
    USD-JPY edged out a two-day low at 107.09, extending the correction from the 20-day high that was seen on Monday at 107.78. The yen was bid during the late New York session, while the dollar had also come under pressure, setting up USD-JPY's new low today, though ranges in forex markets have been quite narrow so far today. Concerns about a second wave of coronavirus infections as economies reopen have given the safe haven Japanese currency an underpinning, while speculation that the Fed may be forced into adopting a negative interest rate policy framework has been weighing on the dollar a little. Market attention is now on today's speech by Fed chairman Powell (from 09:00 ET/13:00 GMT). We expect him to dismiss the view that rates will be eased below zero by the end of the year, a stance he's indicated several times of late. Fed's Bullard yesterday dismissed negative interest rates, arguing that an expansion in QE would be a better policy option, if needed. The combo of tensions between the U.S. and China, and fears of a second wave of coronavirus infections, looks set to keep risk-off positioning in play, which in turn should be supportive of the yen versus most other currencies. Markets are concerned about the risk of a second wave of coronavirus infections as economies reopen from lockdowns. Wuhan in China, the origin of the virus, reported new infections this week, as did South Korea, and Russian reported a record daily increase in confirmed cases. German has also seen its "R rate" (the reproduction rate of the virus) rise back above 1, indicating that the virus is spreading exponentially again. The combo of trade and geopolitical tensions, and fears of a second wave of coronavirus infections, looks set to keep risk-off positioning in play, which in turn should be supportive of the yen versus most other currencies.

    [GBP, USD]
    Cable edged out a three-week low at 1.2255, while the pound concurrently printed a three-week low against the euro. The uncertain tone in global equity markets has translated to weakness in the pound, which has developed a quite strong positive correlation with stock market direction during the pandemic era to far. At prevailing levels Cable is in the lower reaches of the range that's been prevailing since early April, which in turn marks a consolidation of the gains seen out of the 35-year low at 1.1409 that was seen in mid March. Despite the high infection rate and death total in the UK, the country this week has initiated a baby-step toward reopening its economy this week, with non-essential manufacturing reopening. The UK and EU, meanwhile, are amid the next round of trade talks. 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 trade deal in place 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 edged out a six-day high at 1.4085, driven by moderate underperformance in the Canadian dollar, which has come with oil prices turning softer after seeing one-month highs yesterday. While oil prices are up by over 25% rebound from the April-28th low, crude prices are still 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 8% 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. All going well, this would 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, of course, in the event that reopenings cause a significant second wave of infections.

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