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By XE Market Analysis May 22, 2020 4:18 am
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    XE Market Analysis: Europe - May 22, 2020

    The dollar and yen are in outperforming mode as global stocks drop as China, at its annual National People's Congress, confirmed that there will be a bill establishing "an enforcement mechanism for ensuring national security" for Hong Kong. U.S. President Trump had earlier said he would "react strongly" if Beijing proceeds with this plan, which will quash democracy in the Special Administrative Region and break the 50-year "one country, two systems" agreement made with the UK at the 1997 handover. The London Times reported that PM Johnson, who until recently had a reputation as being soft on China, is seeking to end reliance on some Chinese imports. Hong Kong's Hang Seng equity index has been clobbered, falling by nearly 6%. Most of the other main stock indices across the Asia-Pacific region have been showing losses ranging from around 0.5% to 2.0%. S&P 500 futures were showing a 0.9% decline, building on the 0.8% loss seen by the cash index at the Wall Street closing bell yesterday. In the forex realm, the narrow trade-weighted USD index (DXY) rose to a three-day high at 99.62, extending the rebound from the 18-day low seen on Wednesday at 99.01, while EUR-USD concomitantly posted a three-day low at 1.9015. AUD-USD dove over 0.7% in printing a low at 0.6516, extending a correction from Wednesday's 10-week high at 0.6618, while USD-CAD rallied by over 0.5% in posting a high at 1.4030, a four-day peak. The Canadian dollar, like other oil-correlating currencies, has been negatively impacted by a 6%-drop in oil prices today. July WTI oil futures posted a four-day low at $30.74, in what is now the biggest correction crude prices have seen since late April. Despite the general bid in the dollar, yen outperformance saw USD-JPY edge out a three-day low at 107.32. The biggest mover out of the main currencies has been AUD-JPY, which racked up a loss of 1%. Incoming data and the BoJ policy announcement had little impact on currencies today.

    [EUR, USD]
    EUR-USD posted a three-day low at 1.9015, driven lower by abroad haven-bid for dollars as Hong Kong re-emerges as a flash point in U.S.-China, and West-China, relations. The narrow trade-weighted USD index (DXY) rose to a three-day high at 99.62, extending the rebound from the 18-day low seen on Wednesday at 99.01. 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]
    Yen outperformance today saw USD-JPY edge out a three-day low at 107.32. The biggest mover out of the main currencies has been AUD-JPY, which racked up a loss of 1%. The Japanese currency has been outperforming on the back of rise in its safe haven premium, with Hong Kong re-emerging a flashpoint in U.S.-China relations. Incoming data and the BoJ policy announcement had little impact on currencies today. Japanese April inflation saw headline CPI at just 0.1% y/y, which was below the median forecast for expected 0.2%. The BoJ left maintained its short-term interest rate target at the JGB yield target following its policy meeting today, as expected, while launching a new loan scheme and extending the deadline for virus-combating steps by six months. Markets will be sharply focused on evolving U.S.-China, and more broadly West-China, relations in light of Beijing's plans to rescind its 50-year "one nation, two systems" agreement made with the UK at the handover of Hong Kong in 1997, which will quash democracy in the Special Administrative Region. Another focal point will be on opening economies following lockdowns, and how successful these are in not, or otherwise, sparking a second wave of coronavirus infections. The yen clearly retains its role as safe haven currency, so any further prolonged risk-off episodes would see the currency rally against most others, particularly the commodity currencies, and many developing nation currencies that have similar high beta characteristics.

    [GBP, USD]
    The pound has today partially pared gains seen earlier in the week as global stock markets, which the UK currency has been correlating quite strongly with during the pandemic crisis era so far, turned lower. UK retail sales were released first thing in London, and were even worse than expected in April, tumbling by 18.1% m/m and by 21.6% in the y/y comparison. The data are no surprising for markets, however, even if the headlines undershoot economist expectations, given the lockdown situation. We seen the pound as remaining on the list of currencies that are vulnerable to further declines. Aside from sterling's proclivity to correlate with stock markets, is the ongoing risk that the UK leaves its post-Brexit transition membership of the EU's single market at year-end. UK-EU trade negotiations 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 rallied by over 0.5% in posting a high at 1.4030, a four-day peak. The Canadian dollar, like other oil-correlating currencies, has been negatively impacted by a 6%-drop in oil prices today. July WTI oil futures posted a four-day low at $30.74, in what is now the biggest correction crude prices have seen since late April. A flare up in geopolitical tensions between the U.S. and China have hit oil and other commodity prices. Markets will be sharply focused on evolving U.S.-China, and more broadly West-China, relations in light of Beijing's plans to rescind its 50-year "one nation, two systems" agreement made with the UK at the handover of Hong Kong in 1997, which will quash democracy in the Special Administrative Region. Another focal point will be on opening economies following lockdowns, and how successful these are in not, or otherwise, sparking a second wave of coronavirus infections.

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