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By XE Market Analysis April 29, 2020 7:17 am
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    XE Market Analysis: North America - Apr 29, 2020

    The dollar has been trading with a softening bias so far today amid a backdrop of overall perky, but cautious global stock markets, with the commodity currencies continuing to outperform while the likes of the euro, sterling and yen left somewhere in the middle. Stock markets mostly gain in Asia and Europe, though European markets pared gains into the Fed's policy announcement later. Oil prices have also gained roughly 40% from yesterday's nadir. Incoming Q1 GDP reports are largely being overlooked, being too backward looking. The narrow trade-weighed USD index ebbed to a low at 99.54 after closing yesterday in New York at 99.87. Yesterday's two-week low at 99.45 has so far been left untroubled. EUR-USD lifted over 50 pips to a high of 1.0874, though remained below yesterday's nine-day high at 1.0890. USD-JPY carved out a fresh six-week low at 106.36, racking up today as the sixth consecutive day of declines. EUR-JPY printed a three-year low, though the yen has been trading more neutrally versus many other currencies, and has hit a seven-month low against the outperforming Australian dollar. Note that Japan was closed for a public holiday today. AUD-USD gained over 0.7% in posting a seven-week high at 0.6547. Australia's Q1 GDP number came in a tad higher than expected at 0.3% q/q in the headline rate. Optimism has been prevailing, overall, on hopes that the reopening of some economies, and the planned reopening in other economies, and hopes that, with sufficient measures, such as social distancing, protective equipment (masks, which, for instance, will be mandatory on Italian public transport), along with the rapid deployment of diagnostic and serological testing, the reopenings will be feasible without causing a second wave of coronavirus infections.

    [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]
    The yen has been trading mixed amid a backdrop of cautious optimism in global markets. USD-JPY carved out a fresh six-week low at 106.40, driven by a continued phase of dollar softness and racking up today as the sixth consecutive day of declines. EUR-JPY printed a three-year low, though the yen has been trading more neutrally versus many other currencies, and has hit a seven-month low against the outperforming Australian dollar. Note that Japan was closed for a public holiday today. The BoJ this week 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.

    [GBP, USD]
    Cable lifted to a 1.2486 high on the back of dollar softness. Sterling remains up by an averaged 1% versus the dollar, euro and yen from week-ago levels, reflecting its correlation with global stock market performance. The UK currency has been apt to perform similar to other "risk-off" currencies, such as commodity currencies, during the pandemic crisis, with the combo of the UK's open economy, current account deficit and outsized financial sector, making the currency sensitive to swings in risk appetite in global markets. With the global rate of coronavirus inflection in decline, and major economies starting a phased reopening (and while the UK remains in lockdown, the UK Treasury is reportedly drawing up measures to "get Britain back to work," including plans for "Covid-secure offices), 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]
    USD-CAD has printed a two-week low at 1.3926 in what is now the third consecutive day of decline. A 40%-odd gain in WTI oil prices out of yesterday's $10.07 low, to levels back above $15.00, has helped keep the Canadian dollar buoyed. There are bullish oil 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. The reopening of some economies, and expectations for more reopenings, should also lift demand. We are bearish of USD-CAD, anticipating a return to levels around 1.3500 over the coming weeks.

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