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By XE Market Analysis May 20, 2020 4:15 am
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    XE Market Analysis: Europe - May 20, 2020

    Directionally challenged have been the major dollar pairings and associated cross rates so far today, which has come against a backdrop of flagging stock markets, although S&P 500 futures have managed a 0.5% gain in overnight trading after the cash version of the index close on Wall Street yesterday with a 1.05% loss. Optimism in markets has been suppressed by a reality-check on the scope for a vaccine for the SARS Cov-2 coronavirus has weighed on sentiment, along with the continued bubbling of tensions between the U.S. and China, and Australia and China (an editorial in China's state-controlled Global Times today described Australia as being a "giant kangaroo that serves as a dog to the U.S."). Incoming data to Japan (Tankan business survey and machinery orders), Australia (retail sales) and the UK (inflation), have had little impact, with markets remaining desensitized to data as investors try an fathom the scope for economic rebound as economies reopen. China said that 95.4% of major industrial firms employees have now returned to work, while Japan's deputy head of the coronavirus panel warned of a possible new wave of infections before winter. In currencies, EUR-USD traded slightly firmer, to levels near 1.0950, but remained comfortably shy of the 16-day high seen Tuesday at 1.0977. USD-JPY posted little more than a 30-pip range in the upper 107.00s. AUD-USD held steady, below the 10-week high that was seen yesterday at 0.6586. The New Zealand dollar lifted after RBNZ Governor Orr said he is not considering going negative with interest rates at this juncture, though NZD-USD remained a couple of pips shy of the eight-day high seen yesterday at 0.6120. NZD-JPY posted a three-week high. USD-CAD remained heavy after yesterday printing a three-week low at 1.3864. Front-month WTI prices consolidated lower from the nine-week high seen yesterday at $33.44. Sterling took a moderate rotation lower against the dollar, euro and other currencies, correcting after rising over the previous two sessions.

    [EUR, USD]
    EUR-USD traded slightly firmer, to levels near 1.0950, but remained comfortably shy of the 16-day high seen Tuesday at 1.0977. The common currency found domestically-driven support yesterday from rare good-news from the data front, with the forward-looking German ZEW investor confidence for May surging back to a 51.0 headline reading -- the highest since April 2015 -- after the 28.2 outcome in April and the -49.5 low that was seen in March. The current conditions component of the survey still reached a new low of -93.4, however. EUR-USD continues to trade in a broad consolidation range near the halfway mark of the volatile range that was seen during the height of the global market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. We expect the pair to lack sustained directional bias for now. There is little divergence in central bank policy currently, with both the ECB and the Fed pursuing aggressive easing policies, with both Europe and the U.S. facing significant economic headwinds from virus-containing lockdown measures.

    [USD, JPY]
    USD-JPY has posted little more than a 30-pip range in the upper 107.00s so far today (as of the early London AM session). The yen has seen little direction against other currencies, too, consolidating recent losses that reflected an unwinding in the Japanese currency's safe-haven premium. Optimism in markets has been suppressed by a reality-check on the scope for a vaccine for the SARS Cov-2 coronavirus has weighed on sentiment, along with the continued bubbling of tensions between the U.S. and China, and Australia and China (an editorial in China's state-controlled Global Times today described Australia as being a "giant kangaroo that serves as a dog to the U.S."). Incoming data to Japan, which today included the latest quarterly Tankan business survey (which unsurprisingly showed sentiment to be at a decade low) and March machinery orders (which were less worse than expected in contracting by just 0.4% m/m, though a notoriously volatile month-to-month data series), had little market impact. Other recent data out of Japan showed March final confirming industrial production to have contracted 3.7% m/m. Japanese Q1 GDP numbers, released yesterday, 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. Japan's deputy head of the coronavirus panel warned of a possible new wave of infections before winter. The principal driven of yen direction will continue to be global stock market direction, to which the yen has an enduring negative correlation with.

    [GBP, USD]
    Sterling took a moderate rotation lower against the dollar, euro and other currencies, correcting after rising over the previous two sessions. Cable ebbed to the lower 1.2200s, down from the one-week high that was seen yesterday at 1.2297. UK April CPI, released first thing in London, fell to a 0.8% y/y rate, the lowest level seen since August 2016 and down from 1.5% y/y in March. The outcome slightly undershot the median forecast for 0.9% y/y. Not surprisingly, falling energy and fuel pump prices contributed the biggest downward components to the shift in headline inflation, with core CPI consequently declining more moderately, to a rate of 1.4% y/y, from 1.6% y/y in the month prior, matching the median expectation. The rebound in oil prices over the last month, coupled with reopening economies, should put the brakes on the disinflationary trend. The pound will continue to take most of its directional cues from broad direction in global stock markets (to which the UK currency has been correlating positively with over the pandemic crisis era so far) and developments on the UK-EU trade negotiation front. We expect the pound's upside to be limited given risk of the UK leaving its post-Brexit membership of the EU's single market at year-end. Negotiations between the UK and EU are coming to a head, with less than a month-and-a-half until the July-1st deadline for the UK to decide whether it wants to extended is post-Brexit transition membership of the EU's single market (which includes 40 free-trade deals with global economies) beyond year-end.

    [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 has remained heavy after yesterday printing a three-week low at 1.3864. The prospective for the Canadian dollar appears to be of the bullish variety given the currency's link with oil prices. Front-month WTI prices, while consolidating at slightly softer levels today, yesterday hit a nine-week high at $33.44. The high was seen after the American Petroleum Association reported a 4.8 mln barrel draw on crude inventories in the world's biggest economy in the week ending May 15th, contrary to the median forecast for a 2.4 mln barrel inventory build. This evidenced the impact of both oil output cuts by both U.S. producers and members of the OPEC+ group, along with rising demand as major economies reopen from lockdown (which has seen a massive increase in traffic, among other oil-consuming activities). We remain bullish on the Canadian dollar, which continues to trade at a discount following the sharp drop in oil prices over the March-April period. The April-30th low at 1.3848 provides a downside waypoint for Canadian dollar bulls, marking the lowest point the pair has traded since mid March. We see scope for a return to levels around 1.3500.

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