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By XE Market Analysis May 25, 2020 4:21 am
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    XE Market Analysis: Europe - May 25, 2020

    The dollar has remained buoyant amid narrow ranges in early-week trading so far. Conditions will be thin today with both UK and U.S. markets out for public holidays. Tensions between the U.S. and China continued to build over the weekend. Amid the developments, the U.S. will be adding anther 33 Chinese companies and institutions to an economic blacklist on the accusation that they are helping China spy. The White House national security adviser, meanwhile, said economic sanctions would likely be imposed on Hong Kong and China if Beijing moved ahead with its proposed national security law for Hong Kong. Beijing, for its part, said it will not back down from the "technology war mongering" while warning of "ample countermeasures." The narrow trade-weighted USD index edged out a one-week high at 99.93, while EUR-USD ebbed to a one-week low at 1.0875. USD-JPY matched Friday's high at 107.78, though didn't breach it. AUD-USD settled in the lower 0.6500s, above the 0.6506 low that was seen on Friday. USD-CAD consolidated gains seen in the latter part of last week, which on Friday left a one-week high at 1.4050. The pair settled near the 1.4000 mark. Oil prices are moderately firmer today, though remain off the 11-week highs seen last week. In stock markets, the Nikkei 225 rallied 1.7% and posted its highest daily close since March 6th, while the Hang Seng and China's main indices traded in the red, though pared losses during the PM session. On the coronavirus front, focus remains on reopening economies and a rebound in economic activity. Brazil remains a rapidly emerging hotspot, and now has the second highest level of confirmed cases, behind the U.S.

    [EUR, USD]
    EUR-USD ebbed to a one-week low at 1.0875, driven by broad, albeit moderate, buoyancy in the dollar, which is finding a degree of safe haven demand as weekend developments showed a continued rise in U.S.-China tensions. Hong Kong has re-emerged as a flash point in U.S.-China, and West-China, relations. The narrow trade-weighted USD index edged out a one-week high at 99.93. 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, though political tensions among Eurozone members, coupled with the dollar's role as a haven, suggest the risks are to the downside. 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 matched Friday's high at 107.78, though didn't breach it. We anticipate that both the dollar and will remain prone to outperformance in the coming weeks given the ratcheting-up in U.S.-China tensions. Tensions between the two economic superpowers continued to build over the weekend. Amid the developments, the U.S. will be adding anther 33 Chinese companies and institutions to an economic blacklist on the accusation that they are helping China spy. The White House national security adviser, meanwhile, said economic sanctions would likely be imposed on Hong Kong and China if Beijing moved ahead with its proposed national security law for Hong Kong. Beijing, for its part, said it will not back down from the "technology war mongering" while warning of "ample countermeasures." This backdrop is now overshadowing the reopening of economies and consequently rebound in economic activity, although it should be clear by now that conditions are not likely to normalize until such time there is a vaccine. Brazil remains a rapidly emerging hotspot of coronavirus infections, and now has the second highest level of confirmed cases, behind the U.S. In Japan, Apple will be reopening some of its stores this week. The government has begun finalizing a 100 tln yen coronavirus relief package. In data, the March final leading indicator was revised slightly higher to 84.7 from 83.8 in the preliminary estimate.

    [GBP, USD]
    Cable has opened the week fractionally above the one-week high that was seen on Friday at 1.2161. The pair is 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. We remain bearish of the pound, which has been correlating with global stock market direction during the pandemic crisis era so far, given the risk of the UK leaving its post-Brexit transition membership of the EU's single market at year-end. London markets will be closed on Monday for a public holiday, and the week following is quiet in terms of scheduled data and central bank events. Data out over the last week painted a picture of an economy deep in contraction as a consequence of the lockdown, from which the country has only partially emerged from. UK-EU trade negotiations are coming to a head, with only one final round of talks left until the mid-June EU Council meeting. The UK has until July-1st to decide whether it wants to extend is post-Brexit transition membership of the EU's single market (which includes 40 free-trade deals with global economies) beyond year-end. The UK government has repeatedly insisted that it is quite prepared to leave should it not get what it wants in a trade deal. This is a "threaten-to-walk-away" negotiation bluff, to a degree, though will nonetheless curtail the pound's upside potential. Leaving the EU's single market would, overnight, put a large portion of UK trade on less favourable WTO terms. The prevailing consensus is that the UK will neither ask for or obtain an extension of its transition membership of the EU's single market. Most likely a compromise will be found at the last minute, as are apt to happen in negotiations, though we still think there is a chance that the UK will ask for a one-year extension. The pound will remain the main conduit of market sentiment with regard to the UK-EU trade talks, and we can expect the forex market it to be increasingly reactive to news on this front over the coming weeks.

    [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 consolidated gains seen in the latter part of last week, which on Friday left a one-week high at 1.4050. The pair settled near the 1.4000 mark. Oil prices are moderately firmer today, though remain off the 11-week highs seen last week. An FT on a report detailed a sharper drop in U.S. oil output, with further declines expected later in 2020. Many oil mining operations have been rendered unviable at prevailing prices. This should be a positive for oil-correlating currencies, such as the Canadian dollar, though concerns about U.S.-China tensions is offsetting for now. Another focal point for commodity currencies is on opening economies following lockdowns, and how successful these are in not, or otherwise, sparking a second wave of coronavirus infections. Note that BoC Governor Poloz will be speaking today on "Monetary Policy in Unknowable Times." With regard to what policy guidance he will give, the clue seems to be in the title.

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