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By XE Market Analysis April 30, 2021 7:17 am
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    XE Market Analysis: North America - Apr 30, 2021

    The DXY dollar index lifted above its Thursday high while EUR-USD concurrently ebbed under 1.2100 from yesterday's two-month high at 1.2150. The 10-year U.S. T-note yield, which remains a fixation for forex markets, continued to orbit around 1.650% -- remaining up by over 10 bp on the lows that were seen last week. The dollar also posted gains versus the likes of the pound and Australian and New Zealand dollars, though outperformance in the Canadian dollar and yen weighed on USD-CAD and USD-JPY. USD-CAD edged out a fresh three-year low at 1.2266 in what is the pair's 10th month of decline out of the last 13 months, being a strong correlate of oil prices, which although coming off the six-week highs that were seen yesterday, still remain up by over 5% from the lows that were seen last week -- and by 226% from year-ago levels. A cautious sentiment returned in global asset markets after the S&P 500 and Nasdaq hit new records yesterday. U.S. equity futures racked up losses of over 0.5%, despite Amazon reporting an earnings beat, while European and Asian stock markets declined. As Reuters highlighted, just over half of S&P 500 companies have divulged their quarterly earnings, with 87% having beaten expectations, the highest level in recent years. But, rising input prices and, in the U.S., a planned rise in taxes, juxtaposed to lofty valuations, seems to have been be curtailing upside momentum on Wall Street lately, even while the main indices have been scraping out new highs. In data, April PMI data out of China were mixed. Eurozone Q1 GDP data contracted 0.6% q/q, contrasting sharply with the stellar 6.4% expansion the U.S. economy saw. Eurozone April HICP inflation lifted to 1.6% y/y by an expected base effect. Ex-energy, the annual rate in fact eased to 0.8% y/y from 1.0% y/y.

    [EUR, USD]
    EUR-USD has ebbed back under 1.2100, extending the so-far moderate correction from yesterday's two-month high at 1.2150. Broader shifts in the direction of the dollar have continued to be the dominant driver of the pairing, though the euro has tended to modestly outperform other currencies during up phases in EUR-USD and modestly underperform during down phases. Eurozone Q1 GDP data contracted by 0.6% q/q, contrasting sharply with the stellar 6.4% expansion the U.S. economy saw in the same quarter, although the data is too backward looking to have much bearing on markets, especially with peak pessimism about the Covid situation on continental Europe having passed, and with Eurozone growth and inflation are set to rise smartly over the coming months, although still lag the U.S. Eurozone HICP inflation lifted to 1.6% y/y in the advanced reading for April, up from 1.3% y/y in the previous month, which was expected and a reflection of the y/y base effect. Ex-energy, the annual rate in fact eased to 0.8% y/y from 1.0% y/y, and services price inflation decelerated to 0.9% y/y from 1.3% y/y. The data fits the ECB's assessment that generous monetary support will remain necessary. We expect U.S. inflation data to contrast, with upward trajectory extending beyond the "base effects" that are clearly lifting the y/y measures. In April U.S. 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. Despite arguments for inflation pressures to plateau later in the year, the data will likely see a rising bias in longer-dated U.S. yields re-establish as markets return to pricing in contingency risk that the Fed may be forced to tighten sooner than the 2024 start point it has been signalling.

    [USD, JPY]
    USD-JPY drifted into the upper 108.0s after yesterday posting a 17-day high at 109.22. Yen crosses also turned lower, with the Japanese currency picking up a degree of safe haven demand as global stock markets took a turn lower. Note that Japanese markets will be closed Monday through to Wednesday next week, as will Chinese markets.

    [GBP, USD]
    The pound has corrected some after posting gains versus the other G10 currencies over the last day, led by GBP-JPY which is printed a 24-day high before coming off the boil. Cable has settled in the low 1.3900s after hitting a 10-day high at 1.3977 yesterday. The UK currency has over the last month underperformed, aside from the case against the dollar and yen, 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.

    [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 edged out a fresh three-year low at 1.2266 in what is amid the pair's 10th month of decline out of the last 13 months. The pair is strong correlate of oil prices, which although settling off the six-week highs that were seen yesterday, still remain up by over 6% from the lows that were seen last week -- and by 226% from year-ago levels.

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