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By XE Market Analysis May 27, 2020 4:24 am
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    XE Market Analysis: Europe - May 27, 2020

    The dollar has picked up moderately amid a backdrop of geopolitical risk. While pro-democracy protests continued in Hong Kong's central business district, reports came in that Beijing has expanded the scope of its Hong Kong security law to cover organisations as well as individuals. It will go before the Chinese parliament this week where it's expected to be ratified into law. The U.S. has threatened counter measures if the law comes into effect, and the EU has signalled it will be giving a "robust" message to China on the issue. The Hang Seng and main Chinese equity indices underperformed, with losses of 0.9% and 0.3% respectively. Other markets in Asia-Pacific mostly fared better, buoyed by reopening economics and positive developments on the vaccine/treatment front with regard the Covid-19 coronavirus. Japan's Nikkei closed with a 0.7% gain, though both South Korea's KOPSI and Australia's ASX traded flat. The S&P 500 closed on Wall Street yesterday with a 1.2% gain, and futures of the index are up over 0.5%, though off its highs. In the forex realm, the narrow trade-weighted USD index inched up to a high of 99.21, up from yesterday's 24-day low at 98.90. EUR-USD concurrently ebbed to a 1.0951 low, down from yesterday's six-day high at 1.0997. USD-JPY edged out a five-day low at 107.36, which marked the base of a sub 30-pip range. The commodity currencies traded with with little direction, consolidating recent gains. AUD-USD settled in the mid 0.6600s, below the 11-week high that was clocked yesterday at 0.6676. USD-CAD traded a narrow range in the upper 1.37s, above yesterday's 10-week low at 1.3755. Front-month WTI oil prices are softer today after yesterday hitting an 11-week high at $34.81. The IEA said that the pandemic crisis is causing the biggest fall in global energy investment in history.

    [EUR, USD]
    EUR-USD ebbed to a 1.0951 low, down from yesterday's six-day high at 1.0997, with direction was again be driven by a broader move in the U.S. currency. The dollar has picked up moderately amid a backdrop of geopolitical risk. While pro-democracy protests continued in Hong Kong's central business district, reports came in that Beijing has expanded the scope of its Hong Kong security law to cover organisations as well as individuals. The U.S. has threatened to take measures if the law is implemented. The narrow trade-weighted USD index inched up to a high of 99.21, up from yesterday's 24-day low at 98.90. 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 edged out a five-day low at 107.36, which marked the base of a sub 30-pip range. We retain an overall bearish view of the pairing, with both the coronavirus pandemic and Hong Kong issue escalating U.S.-China, and more broadly West-China, relations. There is also a risk that markets are over-anticipating the scope for a full recovery from reopening economies, especially given the risk that there could be a second-wave of infections. This could return demand of the yen as a safe haven. Regarding Hong Kong, while pro-democracy protests continued in Hong Kong's central business district, reports came in that Beijing has expanded the scope of its Hong Kong security law to cover organisations as well as individuals. It will go before the Chinese parliament this week where it's expected to be ratified into law. The U.S. has threatened counter measures if the law comes into effect, and the EU has signalled it will be giving a "robust" message to China on the issue.

    [GBP, USD]
    The pound's proclivity to correlate with stock markets has been on display over the last day, with Cable yesterday rallying concomitantly with global stock markets to posting a 15-day high at 1.2364. Only the Australian and New Zealand dollars outperformed the UK currency out of the main currencies. The causation of sterling's high-beta characteristic, which was seen during the 2008/9 financial crisis and again during current pandemic crisis, is a combo of the UK's open economy, large current account deficit, and relatively outsized financial sector, which renders the currency sensitive to risk-off phases, while on the flip side making it apt to outperform during the risk-back-on phases. Cable has consequently been on an roller coater, plunging in March, at the height of the market panic, by the most over a two-week period on record, which left a 35-five year low at 1.1409. The gain over the last day has pushed the pound back toward the lower reaches of a broad consolidation range that's been enduring since April. Research out of Lloyds bank in London suggests that, with the acute dislocations since in March now fading and markets regaining their posture, the pound's correlative link with global stock markets is weakening. Its Cross-Asset Risk Index has fallen from a positive correlation of 0.85, at the high, to 0.61 now. We continue to anticipate limit potential for a sustained recovery in sterling, which is presently trading at a near 7% year-to-date discount when averaged against the dollar, euro and yen. UK markets are discounting negative repo rate by year-end, while there remains a risk that the UK leaved its post-Brexit transition membership of the EU's single market (which includes 40 free trade agreements around the world) at year-end, which would put a large part of UK trade on much less favourable WTO terms.

    [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 traded a narrow range in the upper 1.37s, above yesterday's 10-week low at 1.3755. The oil-correlating currency has been tracking the ebb-and-flow of crude markets. Front-month WTI oil prices are softer today after yesterday hitting an 11-week high at $34.81. The IEA said that the pandemic crisis is causing the biggest fall in global energy investment in history. An FT on a report at the weekend detailed a sharp drop in U.S. oil output, with further declines expected later in 2020, with many oil mining operations there having been rendered unviable at prevailing prices. This chimes with last Friday's weekly Baker-Hughes rig count, which revealed another 21 oil rigs were shuttered in the U.S., to bring the the tally to 237 after what is now the 10th straight week of closures. Recent dips in oil inventories have also illustrated shifting fundamentals, with reopening economies around the world stimulating more demand, just as supply continues to ebb. Good reason to be bullish of the Canadian dollar.

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