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By XE Market Analysis April 28, 2020 7:46 am
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    XE Market Analysis: North America - Apr 28, 2020

    The dollar has taken a rotation lower concomitantly with a pick up in risk appetite during the London AM session, which saw European stock markets and U.S. equity index futures rally following a low-volume sputtering price action in Asian markets. A paring in steep intraday oil price declines was in the mix. The narrow trade-weighted USD index ebbed by 0.5% in making a 13-day low at 99.50, while EUR-USD concurrently printed a high at 1.0886, a six-day peak, further extending the rebound from last Friday's one-month low at 1.0726, and USD-JPY fell below recent lows in posting a six-week low at 106.61. Most yen crosses haven been steady, though AUD-JPY floated to a seven-week high, with commodity currencies rebounding from weakness as European stock markets rose. The Canadian dollar, after weakening in the Asia-Pacific session amid a 15%-plus tumble in oil prices, rebounded. USD-CAD, after initially lifting out of a five-day low at 1.4017 to levels above 1.4070, about-turned and dropped to 13-day lows under 1.3950. This came as June WTI crude futures rebounded from a low at $10.09, lifting to levels around $12.50, more than halving the intraday decline to around 7% (prices as of the early London PM session). Weighing on oil prices had been news that United States Oil Fund LP, the largest U.S. oil ETF, said it would sell all its front-month crude contracts to avoid further losses. There are bullish arguments in crude market narratives, based on the view that rapidly diminishing storage space will force producers into large output cuts. AUD-USD more than reversed intraday losses and rallied to a seven-week high at 0.6507. The Kiwi dollar pared losses after dropping on a research note from Westpac forecasting the RBNZ to take the cash rate to -0.5% in November this year.

    [EUR, USD]
    EUR-USD has lifted about 0.5% on the back of a softer dollar, which has weakened concomitantly with a rise in European stock markets and U.S. index futures. The pair has printed a high at 1.0886, which is a six-day peak, further extending the rebound from last Friday's one-month low at 1.0726. This puts the EUR-USD a step back toward the halfway mark of the volatile range that was seen during the height of global market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. This week's policy meetings at the ECB (announcing Thursday) and Fed (announcing Wednesday) aren't expected to impart much directional impact EUR-USD, with both central banks already pursuing aggressive loose monetary policies and with neither expected to alter prevailing settings (other than perhaps an extension of the new emergency bond buying program in the case of the ECB) while repeating "do what it takes" guidance. The sharp narrowing in the dollar's yield advantage that was seen in March, when the Fed reversed all rate hikes it make from late 2015 through to last year, came to a pause in early April, with Treasury/Bund yield differentials having since holding steady. The pairing looks likely to lack a clear directional bias, though risks seem to be skewed to the downside given the political stresses within the EU.

    [USD, JPY]
    USD-JPY has fallen below recent lows in posting a six-week low at 106.61. The decline has reflected broad dollar softness, as most yen crosses haven been steady today, while AUD-JPY floated to a seven-week high. The BoJ boosted its JGB purchases at its scheduled operation, but to little impact on the yen. The BoJ yesterday delivered on expectations, announcing that JGB purchases can now be unlimited (formerly capped at Y80 tln per year) while also announcing an increase in corporate bond and commercial paper. The yen hasn't been impacted, with move largely symbolic as the central bank's 0% target on the 10-year JGB was being met without the need for unlimited purchases. With the global rate of coronavirus infection in decline, global stock market sentiment has been buoyed by the commencement of a phased reopening in major economies. Without a vaccine, much will depend on economies return to function without causing a second wave of inflections. The phased approach will also rule out the possibility for there being a V-shaped global economic rebound. With a vaccine not likely to be available until at least next year, one hope is that diagnostic testing becomes so widespread that it would turn the coronavirus from an invisible entity to a visible one, which would allow effective isolation of those infected. But, most countries remain a long way from that (at bet so far achieving a few dozen tests per 1000 people). For now, we expect USD-JPY to continue to trade without a clear directional bias.

    [GBP, USD]
    Sterling has been idling at near net unchanged levels so far today, after rising versus most of the other main currencies yesterday. Cable is settled the low 1.2400s, a little off the eight-day high seen yesterday at 1.2456. The pound was buoyed on Monday by Prime Minister Johnson's return to work after recovering from his brush with Covid-19, and, while Johnson said that it was still too early to ease the lockdown, the UK Treasury is reportedly drawing up measures to "get Britain back to work," including plans for "Covid-secure offices." Recent gains in global stock markets have also lifted the pound, which has been apt to perform similar to other "risk-off" currencies, such as commodity currencies, during the pandemic crisis. The pound is up by over 8% from the 35-year seen in March, but is down by 6% on the year-to-date. The combo of the UK's open economy, current account deficit and outsized financial sector, has meant that the pound has been vulnerable to risk aversion in global markets. With the global rate of coronavirus inflection in decline, and major economies starting a phased reopening, the tide looks to be shifting, though this assumes that the reopening can be done without causing a second wave of infections. This backdrop should help support the pound, though the continued risk for the UK leaving the post-Brexit transition membership of the EU's single market at the end of the year should curtail upside potential.

    [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. Total sight deposits rose by CHF 28.6 bln over the last four weeks, at a diminishing rate (rising by just 3 bln in the last week, through to April 16th) as the demand for the Swiss currency as a safe haven tapered off. 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]
    The Canadian dollar rebounded during the London morning session amid a rally in European stock markets and U.S. equity index futures. The Canadian currency had weakened in the Asia-Pacific session amid a 15%-plus tumble in oil prices. USD-CAD, after initially lifting out of a five-day low at 1.4017 to levels above 1.4070, about-turned and dropped to 13-day lows under 1.3950. The rebound in the Canadian dollar was concomitant with a rebound from lows in oil prices. June WTI crude futures hit a low at $10.09 before rebounding to levels around $12.50, more than halving the intraday decline to around 7% (prices as of the late London AM session). Weighing on oil prices had been news that United States Oil Fund LP, the largest U.S. oil ETF, said it would sell all its front-month crude contracts to avoid further losses amid collapsing prices. But, there is bullish arguments taking hold in market narratives, or at least a view for oil prices to stabilize. Goldman Sachs research, for instance, concluded last week that global oil storage capacity would be reached within three or four weeks, which, once realized, would force a 20% cut in production. Such a cut would be tantamount fo 18-20 mln barrels per day, which would be on top of the 9.7 mln barrels per day cut by OPEC++ nations, which takes effect on May 1st. GS estimated it would take between four and eight weeks for crude to base, noting that the production cuts won't be easy to reverse, which in turn would risk there being a supply deficit.

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