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By XE Market Analysis April 27, 2021 7:13 am
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    XE Market Analysis: North America - Apr 27, 2021

    The dollar has lifted out of an eight-week low at 90.68 by the measure of the DXY index, rising back above 91.0. EUR-USD concurrently ebbed below yesterday's low in making a nadir at 1.2057, which was seen after the pair capped out at 1.2117, and Cable posted a low at 1.3870, some 60 pips down on yesterday's peak. USD-JPY printed a one-week high at 108.43, aided by a measure of broader yen weakness after the BoJ trimmed inflation forecasts. The greenback also made headway against the Australian dollar and its dollar bloc brethren. Some position trimming has been at play into risk events, particularly the 7-year Treasury note auction in the U.S. today. The auction of 2- and 5-year notes yesterday were met with tepid demand, and some market commentaries are putting an especial focus on the 7-year auction today as a badly received auction of 7-year paper back in February was the catalyst for the sharp sell-off in global sovereign bond markets. At the same time, Fed governors will gather today for the two-day FOMC policy meeting. The brightening economic outlook and the improvement in the job situation has so far not been enough to move the needle on policy, with Chair Powell having been emphasizing there is a long way to go until the labour market returns to its pre-pandemic levels. We expect policymakers will continue to refrain from even hinting that they could start thinking about at tapering. But, given strength in the recovery and the trillions of dollars in fiscal stimulus, alongside the evident success in Covid vaccination programs in countries that have advanced rollouts, there is a reasonable chance that markets make a return to pricing in some level of contingency risk that the Fed may be forced to change its tune sooner than it has been signalling. This would be bullish for the dollar. In equity markets, consolidation took hold in Europe and Asia after the S&P 500 and Nasdaq hit new record highs on Wall Street yesterday. Commodity markets remained buoyant, with copper prices hitting new 10-year highs, aluminium posted a three-year peak, while tin and nickel both lifted to two-month highs. Oil prices also lifted to a one-week high.

    [EUR, USD]
    EUR-USD has remained buoyant on the back of dollar softness. Longer-dated Treasury yields have continued to bump along near lows. The Fed's evident success in turning around the inflation risk narrative, by stressing that the economy was a long way from full capacity, has paid dividends in terms of taming bond vigilantes. The Treasury market was perhaps ripe for a rebound after putting in its worst quarterly performance in 34 years in Q1. But, with the U.S. economy building up a head of steam on the back of the Covid vaccine rollout, alongside the release of pent-up consumer demand and outsized fiscal stimulus, and with a central bank that remains steadfastly in uber-accommodative mode, the risks to inflation are to the upside. We have been noting that the upward trajectory for U.S. price increases into 2021 extends beyond the "base effects" that are clearly lifting the y/y measures. In April we expect CPI gains of 0.2% for both the headline and core. The y/y CPI gain should surge to 3.6% from today's 2.6%, while the y/y core price gain should climb to 2.2% from today's 1.6%. We expect y/y CPI gains to set peaks in May of around 3.8% for the headline and around 2.5% for the core. The recent weakness in the dollar will add upside risk to inflation, which in turn should help set the stage for a rebound in the U.S. currency. In sum, a rising bias in longer-dated U.S. yields is likely to re-establish as markets return to pricing in contingency risk that the Fed may be forced to tighten much sooner than the 2024 start point for tightening that it has been signalling. As for the euro, peak pessimism about the Covid situation looks to have passed, and Eurozone growth and inflation are set to rise, but lag the U.S. The ECB left policy settings unchanged last week while signalling an unambiguously dovish bias and kicking the decision on whether to extend the PEPP (Pandemic Emergency Purchase Program) down the road. We continue to anticipate that the directional bias of EUR-USD will shift back to the downside before long.

    [USD, JPY]
    USD-JPY printed a one-week high at 108.39, aided by a measure of broader yen weakness after the BoJ trimmed inflation forecasts. In Japan, the country is facing third state of emergency to contain Covid cases, just months away from hosting the Olympics. The Tokyo motor show was cancelled. In data, Japan March inflation numbers, released last Friday, showed core CPI lifting to a y/y rate of -0.1% from -0.4%. As for USD-JPY, we remain bullish in the bigger picture, anticipating a renewed phase of rising U.S. yields in the months ahead.

    [GBP, USD]
    The pound has been putting in a mixed performance, gaining versus the dollar, euro and yen while losing ground to the dollar bloc currencies today. The UK currency has been underperforming lately, and is showing declines of around 1% against many peers from week-ago levels. The UK's successful, ahead-of-the-pack Covid vaccination program has been baked in, while the sputtering price action across global stock markets has been conducive to pound weakness, with the UK currency having an established pandemic-era proclivity to underperform during phases of risk aversion given that the UK is a relatively open economy with a large balance of payments deficit. Market participants has also considered news that there have been over 100 detected cases of SARS-Cov2 variant B.1.617, aka the Indian variant, in the UK, which has been responsible for the tsunami wave of new Covid cases in India. This variant has two 'escape mutations' that make it able to dodge antibodies and potentially make existing vaccines obsolete. So far, there isn't any indication that this variant is spreading, and UK's significant testing capacity, including surge testing in areas where the Indian variant has cropped up, may be helping to keep it contained. Another issue is the re-emergence of the Scottish independence matter, which has reared up into the UK's local elections in early May. Re-emerging troubles in Northern Ireland are another worry. The UK and EU are working to tweak post-Brexit trading rules with the aim of allaying the concerns of the Unionists in Northern Ireland.

    [USD, CHF]
    Policymakers at the SNB retain a chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

    [USD, CAD]
    USD-CAD has lifted back above 1.2400 after yesterday printing a six-week low at 1.2382. The pair has remained heavy since the BoC surprised this week by trimming QE purchases to $3 bln per week from 4 bln, with policymakers bringing forward their forecast for a return to full capacity growth to the second half of 2022 from 2023. We don't anticipate follow-through buying of the Canadian dollar. Canada continues to grapple with rising new Covid cases, while commodity and oil prices will remain sensitive to the rise in global Covid cases.

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