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By XE Market Analysis May 18, 2020 4:41 am
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    XE Market Analysis: Europe - May 18, 2020

    The commodity currencies have traded firmer, concomitantly with a rise stock markets, which have posted moderate gains in Asia-Pacific markets, while S&P 500 futures have rallied by over 1%. This came after Fed Chairman Powell warned that the Fed is not out of ammunition, and could do more, while warning that he wouldn't bet against the U.S. economy neither in the short nor the long run. ECB chief economist Lane also said that the central bank can extend the PEPP programme in size and/or duration. Oil prices gained, with June WTI crude prices (on the last day before roll over to July contracts) hit a nine-week high at $31.24, buoyed by signs of dropping supply and rising output as global economies reopen from lockdowns. On Friday, data showed operating U.S. oil and natural gas rigs to have fallen to a record low for a second consecutive week. In currencies, AUD-USD lifted above 0.6450 after closing on Friday at 0.0.6415. USD-CAD ebbed to a low at 1.4063, down from Friday's close at 1.4110, though remaining above Friday's low at 1.4016. EUR-USD, meanwhile, plied a narrow range in the lower 1.0800s, and USD-JPY remained directionally immobile in the lower 107.0s. The pound extended losses seen last week, with Cable edging out a fresh near-eight-week-low at 1.2076 and EUR-GBP lifting to a seven-week high at 0.8960. BoE chief economist Haldane hinted that the central bank is considering going negative with its interest rate policy (the repo rate is currently at 0.1%). Also, the latest round of trade talks finished on Friday without offering much sign of encouragement, and with the UK government repeating again that it is prepared to walk away from negotiations. This maintains the risk that the UK might at year-end leave the post-Brext transition membership of the EU's single market without a new trade deal in place. In data, Japan Q1 GDP numbers confirmed that the country is deep in recession, although slightly better than expected at -1.9% q/q.

    [EUR, USD]
    EUR-USD has plied a narrow range so far on Monday in the lower 1.0800s. Fed Chairman Powell warned that the Fed is not out of ammunition, and could do more, while warning that he wouldn't bet against the U.S. economy neither in the short nor the long run. At the same time, ECB chief economist Lane said that the central bank can extend the PEPP programme in size and/or duration. The conflict between Germany's constitutional court and the ECB, meanwhile, 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 peripheral-state yields, particularly Italian, from rising. EUR-USD continues to trade in a broad consolidation range 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 the pari 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. 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 remained directionally immobile in the lower 107.0s, while the Japanese currency lost ground to the commodity currencies, which rallied concomitantly with a fresh rise in global equity markets after Fed Chairman Powell warned that the Fed is not out of ammunition, and could do more, while warning that he wouldn't bet against the U.S. economy neither in the short nor the long run. Japanese Q1 GDP numbers confirmed that Japan is deep in recession, although slightly better than expected at -1.9% q/q. Markets have long been desensitized to incoming data, which currently is largely showing a backward-looking snapshot of economies in lockdown. The combo of tensions between the U.S. and China, and fears of a second wave of coronavirus infections as economies reopen, looks set to maintain the prospect of continued bouts of risk-off positioning, which in turn should be supportive of the yen versus most other currencies.

    [GBP, USD]
    The pound extended losses seen last week, with Cable edging out a fresh near-eight-week-low at 1.2076 and EUR-GBP lifting to a seven-week high at 0.8960. BoE chief economist Haldane hinted that the central bank is considering going negative with its interest rate policy (the repo rate is currently at 0.1%). Also, the latest round of trade talks finished on Friday without offering much sign of encouragement, and with the UK government repeating again that it is prepared to walk away from negotiations. This maintains the risk that the UK might at year-end leave the post-Brext transition membership of the EU's single market without a new trade deal in place.

    [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 low at 1.4063, down from Friday's close at 1.4110, though remaining above Friday's low at 1.4016. The decline reflected demand for the Canadian currency, which, like other oil-correlating currencies was boosted by a fresh gain in oil prices. June WTI crude prices (on the last day before roll over to July contracts) hit a nine-week high at $31.24, buoyed by signs of dropping supply and rising output as global economies reopen from lockdowns. On Friday, data showed operating U.S. oil and natural gas rigs to have fallen to a record low for a second consecutive week.

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