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By XE Market Analysis May 15, 2020 4:07 am
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    XE Market Analysis: Europe - May 15, 2020

    The dollar has settled off its Thursday highs and most commodity currencies softened after rising during the New York afternoon session yesterday, gains which had been concurrent with a rebound on Wall Street. Asian stock markets followed U.S. markets higher, but gains were pared and Chinese and some other markets turned negative amid persisting concerns about souring U.S.-China relations and the risk of second-wave coronavirus outbreaks as economies reopen. Data out of China were mixed, with production rebounding while retail sales remaining under pressure. Chinese production figures are normally considered a bellwether data release, both for the Asia-Pacific region and the globe, though the scope for a enduring recovery in activity looks to be limited with many world economies remaining in a state of semi-lockdown. Among the main currencies, the narrow trade-weighted USD index (DXY) settled in a narrow range marked by 100.26-36, below yesterday's three-week high at 100.55. EUR-USD concurrently held near 1.0800, above the eight-day low printed yesterday at 1.0775. Cable dipped back under 1.2200 but remained above the five-week low seen yesterday at 1.2165. USD-JPY edged out a three-day peak at 107.43 before ebbing back below the day's open in printing a low at 107.14. AUD-USD clocked a two-day high at 0.6474 before turning back under 0.6450, with the pairing continuing a heavy price action after four consecutive days of decline. USD-CAD ebbed to a two-day low at 1.4030, as the Canadian dollar and other oil-correlating currencies broke free of the commodity-currency pack by posting gains. This came with June WTI prices scaling to a five-week high at $28.52 after Saudi Arabia cut sales to key buyers, and with the IEA highlighting that demand is improving. Ahead today, another batch of economic data are due out of Europe, where Q1 GDP highlights, and the U.S., where retail sales and production highlight, though markets are more focused on the scope and success of economic reopenings than backward-looking data.

    [EUR, USD]
    EUR-USD has been holding near 1.0800 so far today, above the eight-day low printed yesterday at 1.0775. Ahead today, another batch of economic data are due out of Europe, where Q1 GDP highlights, and the U.S., where retail sales and production highlight, though markets are more focused on the scope and success of economic reopenings than backward-looking data. 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, along with the dollar's status as a safe haven in the pandemic crisis era, tips the balance toward downside risk. The conflict between Germany's constitutional court and the ECB remains unresolved and could escalate further if the central bank continues to stretch the limits of its mandate in the quest to keep spreads in and prevent Italian yields in particular from rising. Overall, 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, which is being accompanied by concerns that this might spark a second wave of coronavirus infections.

    [USD, JPY]
    USD-JPY edged out a three-day peak at 107.43 before ebbing back below the day's open in printing a low at 107.14. AUD-JPY, a forex market barometer of global investor risk appetite in markets, and a liquid currency proxy of China, also turned lower after rising earlier in the Asia-Pacific session. The yen's ebb-and-rebound tracked a rise and fall back in equity markets. 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.

    [GBP, USD]
    Cable dipped back under 1.2200 but remained above the five-week low seen yesterday at 1.2165. Yesterday marked the fourth consecutive day of decline, and the eighth down down out of the last 10 trading days. Sterling has also been trading heavily against the euro, and other currencies, this week reaching a six-week low against the common currency. The downward trajectory has approximated a decline in global stocks, to which the UK currency has developed a quite close correlation with during the pandemic crisis era so far. The UK's high infection rate of the coronavirus, and high death total, has meant the country is behind the pack in terms of reopening its economy. This, along with the UK's open economy and high current account deficit (which undermines the currency in a global crisis) -- and, not to forget, the continued risk of the UK leaving at year-end the post-Brexit transition membership arrangement of the EU's single market -- has elevated the pound as a favoured major-currency short recommendation. BoE policy expectations also get a mention in many bearish narratives, with the central bank widely anticipated to expand its QE program at its June policy meeting. A more speculative view is that the BoE will also be considering going negative with its policy interest rate (this is also an option for the Fed, of course). The UK government's extension of its job retention scheme, through to October, while more generous than many other countries, is projected to cost a massive GBP 12 bln per month, which is also raising concerns. Overall, given this backdrop, and the dollar's safe-haven status, there is a risk of Cable revisiting sub-1.2000 levels.

    [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 ebbed to a two-day low at 1.4030, as the Canadian dollar and other oil-correlating currencies broke free of the commodity-currency pack by posting gains. This came with June WTI prices scaling to a five-week high at $28.52 after Saudi Arabia cut sales to key buyers, and with the IEA highlighting that demand is improving. While oil prices are up by over 280% from the April-28th low, crude prices are still down by over 56% 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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