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By XE Market Analysis May 21, 2020 4:16 am
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    XE Market Analysis: Europe - May 21, 2020

    The dollar has picked up safe haven demand as stock markets flagged in the Asia-Pacific region, and with S&P 500 futures correcting most of the gains seen during Wednesday's regular session on Wall Street. The narrow trade-weighted USD index rebounded to a high at 99.43, up from the 17-day low seen yesterday at 99.01. The biggest mover out of the main currencies has been AUD-USD, which dropped by nearly 0.5% in printing a low at 0.6549, correcting from yesterday's 10-week high at 0.6618. Another ratchet higher in the U.S. attacks on China catalysed a risk-off mood in markets, with the White House publishing a 20-page dossier of complaint on China, accusing Beijing of predatory economic policies, military build-up, disinformation, human rights violations. A senior administration official was reported a saying that this does not signal a shift in U.S. policy, and while some may downplay it as part of President Trump's election strategy, it is clear that the U.S, and other Western nations, have been growing uneasy about China's power on the world stage, and are feeling a need to reassert themselves. Given the potential and realized impact on trade, this is fostering a re-emergence of nervousness in markets. In other news, RBA Governor Lowe warned that without a Covid-19 medical breakthrough the economic recovery will be slow. The New Zealand government said it will allow bars to reopen, and that it is considering a four-day work week. On the data front, preliminary PMIs reported from Australia and Japan showed predictably sharp contractions for manufacturing along with and a deeply contracted but slightly improved reading for services. Export data from South Korea and Japan were also weak. New Zealand credit card spending for April fell 41.3% m/m. Oil prices have remained buoyant, with front-month WTI crude prices yesterday hitting a 10-week high at $34.43.

    [EUR, USD]
    EUR-USD has dropped back on dollar demand after the pair yesterday posted a 10-day high at 1.1000. A correction low has been logged at 1.0951. The dollar picked up safe haven demand as stock markets flagged in the Asia-Pacific region, and with S&P 500 futures correcting most of the gains seen during Wednesday's regular session on Wall Street. The narrow trade-weighted USD index rebounded to a high at 99.43, up from the 17-day low seen yesterday at 99.01. Concerns about another ratchet higher in U.S.-China tensions has been afoot. 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 aggressively accommodative policy, with both Europe and the U.S. facing significant economic headwinds from virus-containing lockdown measures. Both are amid the early stages or reopening from lockdowns.

    [USD, JPY]
    USD-JPY lifted to an intraday high at 107.86 amid a bout of dollar outperformance, but the pair has remained shy of yesterday's peak at 107.99. The yen fared betted against the commodity currencies, which corrected amid a backdrop of flagging stock markets in the Asia-Pacific region today, and with S&P 500 futures correcting most of the gains seen during Wednesday's regular session on Wall Street. Another ratchet higher in the U.S. attacks on China catalysed a risk-off mood in markets, with the White House publishing a 20-page dossier of complaint on China, accusing Beijing of predatory economic policies, military build-up, disinformation, human rights violations. A senior administration official was reported a saying that this does not signal a shift in U.S. policy, and while some may downplay it as part of President Trump's election strategy, it is clear that the U.S, and other Western nations, have been growing uneasy about China's power on the world stage, and are feeling a need to reassert themselves. Given the potential and realized impact on trade, this is fostering a re-emergence of nervousness in markets. Should this unease persist, this would support the yen against most other currencies, particularly the commodity correlating ones and many developing world currencies.

    [GBP, USD]
    Sterling has been trading mixed so far this week, holding steady against the dollar and yen, while losing ground to the euro and commodity currencies. Cable has ebbed back under 1.2200 in the latest phase, extending the correction from the eight-day high that was seen on Tuesday at 1.2297. The pair remains in the lower reaches of a consolidation range that's been enduring since April, which followed the recovery from the 35-year low seen in March at 1.1409. EUR-GBP, meanwhile, has edged out an eight-week high at 0.9000, with the common currency having developed firming bias against the the pound (aided by the strong rebound in the forward-looking May German ZEW investor confidence reading and developments for a EUR 500 bln EU recovery fund). We expect the pound's upside potential to remain curtailed for now, given the risk of the UK leaving its post-Brexit membership of the EU's single market at year-end. Negotiations between the UK and EU on a trades deal 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 settled to a consolidation of recent losses, above the three-week low that was seen on Tuesday at 1.3864. The prospect 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 10-week high at $34.43. Oil prices are now amid their fourth consecutive week of gains. The EIA inventory data out of the U.S. yesterday showed a 5.0 mln bbl fall in crude stocks, thwarting the consensus forecast for a 1.0 mln bbl increase. This confirmed that the API report had showed on the day before. The inventory data 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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