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By XE Market Analysis April 29, 2021 7:16 am
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    XE Market Analysis: North America - Apr 29, 2021

    The dollar extended its post-Fed announcement decline before rebounding some. The DXY dollar index posted a two-month low at 90.42 before recouping to around 90.70, while EUR-USD pegged a two-month high at 1.2150 before ebbing back towards 1.2100. The lack of even a hint of a possible tapering by the Fed yesterday saw the 10-year T-note yield press back under 1.62% at the lows earlier, though the yield subsequently lifted back to 1.66% with markets anticipating a solid 5.8% y/y print on today's U.S. Q1 GDP release, alongside a spike in chain prices and an expected 84k drop in continuing claims data. S&P E-mini and Nasdaq 100 futures racked up gains of over 0.7% on Globex following stellar earnings reports from Apple and Facebook. Samsung followed-up with an earnings beat, and there were a raft of strong corporate "show and tells" out of Europe, too. In the absence of Japanese markets, which were closed for a holiday, most Asian stock markets gained, led by Chinese and Hong Kong indices, and most European equity markets also rallied. Base metals rallied, with copper and aluminium prices, for instance, hitting respective 10- and three-year highs. Front-month WTI oil price futures rose over 1% in making a six-week high at $64.85. Data releases revealed perky price pressures, with German import prices for March lifting to a rate of 6.9% y/y while Australian export prices rose to a 11.2% q/q clip in Q1. The April Eurozone ESI economic confidence survey came in much stronger than forecast, and while German April unemployment unexpectedly lifted slightly, the accelerating vaccine rollout in Germany and other employment data showed that the labour market is improving there. The dollar bloc and other cyclical currencies rallied against the risk-on backdrop. AUD-USD and AUD-JPY both ascended into respective six-week high terrain, while USD-CAD tumbled to a three-year low, at 1.2285. CAD-JPY rose above its Q1 highs on route to printing 30-month highs.

    [EUR, USD]
    EUR-USD lifted to a two-month high at 1.2150 on dollar weakness, which was a consequence of the Fed's refrain from even hinting at policy tapering in the face of accelerating growth and inflation perkiness. The Fed's evident success over the last month in turning around the inflation risk narrative, by stressing that the economy is a long way from full capacity, paid dividends in terms of taming bond vigilantes. The Treasury market was perhaps ripe for a rebound in April 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 record-level of fiscal stimulus, and with a central bank that remains steadfastly in uber-accommodative mode, the risks for 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 data (released mid May) we expect CPI gains of 0.2% for both the headline and core. The y/y CPI gain should surge to 3.6% from 2.6%, while the y/y core price gain should climb to 2.2% from 1.6%. We expect y/y CPI gains to extend 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 has settled back near 109.00, rising out of the post-Fed low at 108.53. The risk-on tone in global markets has been conducive of yen weakness. AUD-JPY has ascended into six-week high terrain, while CAD-JPY, a cross we have been bullish on for some months now, rose above its Q1 highs on route to printing a 30-month high at 88.64.

    [GBP, USD]
    Sterling, which has developed a pandemic-era proclivity to correlate positively with risk appetite in global markets, posted a nine-day high versus the dollar while hitting respective 2- and 9-day highs against the euro and yen. Sterling has over the last month underperformed the currencies we track (being the G10 units plus several others), aside from the case against the dollar, but still registers as an outperformer on the year-to-date, with only the oil-correlating Canadian dollar and Norwegian krone having risen by a greater extent than the UK currency. We retain a bullish view on the pound against the euro, and more especially the low-yielding currencies of surplus economies, such as Japan and Switzerland, which is hinged on the expectation that the global pandemic recovery trade will continue into 2022. The UK's main equity indices are replete with globally-focused cyclical stocks, which should benefit as major economies rebound. The broad trade-weighted value of the pound still remains near historically weak levels, too. These factors will have to offset any erosion in UK productivity and investment that may become apparent as a consequence of Brexit. UK local elections in early May will warrant monitoring, particularly with regard to how the pro-independence parties fare, and whether they can reach a supermajority in the Scottish parliament. This would legitimise their calls for another independence referendum, though polls have been tipping out of their favour lately. It's a close call: Politico's poll-of-polls tracker currently shows 46% favour remaining in the UK with 45% favouring an exit, with the remaining 9% undecided.

    [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 fell to a three-year low, at 1.2285, amid weakness in the dollar and a degree of Canadian dollar outperformance, with the oil-correlating currency benefiting from the rise in risk appetite in the wake of the Fed's refrain from even hinting at a policy taper, alongside strong incoming corporate earnings results. CAD-JPY, a cross we have been bullish on for some months now, rose above its Q1 highs on route to printing a 30-month high at 88.42. The Canadian dollar has been underpinned since the BoC surprised last 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. The Fed's signalling yesterday contrasted this, and at the same time, in a further bearish influence on USD-CAD, lifted oil prices. Front-month WTI oil price futures hit a six-week high at $64.53 in the wake of the Fed. The OPEC+ group's decision this week to lift output quotas in May caused a degree of sputtering in oil price action, but overall been digested well in markets, which have bought into forecasts for rising oil demand out of major economies. The evident success in Covid vaccination programs in countries that have advanced rollouts has encouraged bullish demand forecasts. With regard to ongoing pandemic concerns, particularly the situation in India (which is the world's third biggest importer of oil), lab tests have found that existing vaccines still offer a good degree of protection against the new variant there. With global vaccine production capacity ramping up month by month, there remain good grounds for optimism.

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