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By XE Market Analysis February 22, 2021 7:18 am
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    XE Market Analysis: North America - Feb 22, 2021

    It's all about yield differentials in currency markets at the moment. The Aussie dollar, for instance, has pegged fresh trend highs against most currencies in synchrony with Australian yields rising more than peers over the last week. UK yields have also been among those showing the biggest basis point rise, even more than U.S. Treasuries over the last week, which has seen the pound clock a new major trend high against the dollar today. Global stock markets have continued to exhibit a sputtering price action near highs, though the reflation trade has remained strong in commodity markets, with copper prices hitting new 10-year highs and other base metals also seeing new multi-year highs. Rising yields shouldn't in themselves pose a threat to the reflation trade, assuming Covid cases continues to fall, the vaccination program works and global economies reopen, allowing stimulus and the presumed consumer spending of 'lockdown savings' to take full effect. Rising interest rates and yields go hand in hand with major equity bull markets, and improving corporate profits should enable stocks to be carried higher. Research by SocGen highlighted the consensus expectation for earnings to rise 30% in 2021 for companies in the MSCI World Index, and by 40% in emerging markets. In currency markets today, EUR-USD ebbed below 1.2100 before recouping to around 1.2150. The yen has been underperforming with JGB yields conspicuously lagging a long way behind the steep yield rises of other sovereigns. The 10-year Japanese benchmark yields has risen by less than 0.5 of a basis point from week-ago levels, in sharp contrast to the 15 bp rise of the the 10-year U.S. T-note yield and the near 31 bp rise in the Australian 10-year yield over this time, for instance. The divergence is much greater on the year-to-date comparison and yet more so when compared to the historic yield lows that were seen during the height of the pandemic. USD-JPY earlier posted a four-day high at 105.84, while AUD-JPY printed a 26-month high, EUR-JPY lifted towards the 26-month high the cross saw last week, and GBP-JPY clocked a new 23-month high. AUD-USD traded above 0.7900 for the first time since March 2018, while NZD-USD posted a 35-month high. USD-CAD posted a 35-month low at 1.2579. Cable pegged a new 34-month at 1.4052. The pound also edged out an 11-month high against the euro, and a 23-month versus the yen, though has fared less robustly in the case against the dollar bloc. Bitcoin clocked fresh record highs in what is either a major bubble or major coming-of-age rally.

    [EUR, USD]
    EUR-USD ebbed to the lower 1.2100s, remaining comfortably above its Friday lows. Further declines seem more likely than gains at this juncture. U.S. Treasury yields have been rising faster than Bund yields, while Eurozone nations are likely to lag behind the U.S. and UK in reopening due to the relative pace in Covid vaccination programs.

    [USD, JPY]
    The yen has been underperforming in synchrony with JGB yields conspicuously lagging a long way behind the steep yield rises of other sovereigns. The 10-year Japanese benchmark yields has risen by less than 0.5 of a basis point from week-ago levels, in sharp contrast to the 15 bp rise of the the 10-year U.S. T-note yield and the near 31 bp rise in the Australian 10-year yield over this time, for instance. The divergence is much greater on the year-to-date comparison and yet more so when compared to the historic yield lows that were seen during the height of the pandemic. USD-JPY earlier posted a four-day high at 105.84, while AUD-JPY printed a 26-month high, EUR-JPY lifted towards the 26-month high the cross saw last week, and GBP-JPY clocked a new 23-month high. We anticipate continued yen underperformance during 2021, assuming that the reflation trade holds up.

    [GBP, USD]
    The pound is remaining buoyant. UK yields have also been among those showing the biggest basis point rise of late, even more than U.S. Treasuries over the last week, which has aided Cable to a new 34-month high at 1.4052. The pound also edged out an 11-month high against the euro, and a 23-month versus the yen, though has fared less robustly in the case against the dollar bloc, which have also been in the outperforming lane of currencies. The UK's ahead-of-the-pack Covid vaccine program has been giving the undervalued pound an underpinning. With the UK nations still enduring lockdown measures, Prime Minister Johnson will later today outline a roadmap to lifting Covid restrictions, which are expected to by a cautious step-by-step approach. Vaccinations, and evidence that the program is proving effective, alongside a build up in natural herd immunity (from those having recovered from a Covid infection) and seasonal factors bode well for reopening prospects. A sharp focus will remain on the various new, highly transmissible variants, though so far these evidently haven't prevented a sharp worldwide drop in new cases, including in areas and countries will loose restrictions. The UK economy and the pound underperformed peers during the height of the first lockdowns last year, and the vista of reopening is having the opposite effect.

    [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 posted a 35-month low at 1.2579. The Canadian dollar also hit a fresh one-year high versus the yen and a five-month peak in the case against the euro. This comes with oil prices having lifted out of the correction lows that were seen on Friday. Front-month WTI oil futures nearly retraced Friday's decline in posting a intraday high at $60.18. The 13-month high that was seen last Thursday is at $62.26, though oil prices still remain up by nearly 23% on the year to date, which markets a substantial improvement the terms of trade of the Canadian economy. We had been arguing that oil prices were due a correction, despite all the talk of a return to $100, given that prices are firmly back into pre-pandemic levels and with global demand is likely to take a considerable time to fully recover to pre-Covid levels, alongside the fact that U.S. supply is set to ramp higher.

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