Home > XE Currency Blog > XE Market Analysis: North America - Feb 23, 2021


XE Currency Blog

Topics7698 Posts7743
By XE Market Analysis February 23, 2021 7:20 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5622
    XE Market Analysis: North America - Feb 23, 2021

    The dollar lifted out of lows following a four trading day run lower, lifted in part by a sharp drop in cryptocurrencies and a correction in base metals, which had earlier in many cases printed new multi-year highs. Equity markets also saw pronounced declines following some disappointing corporate earnings reports. Amid this, the DXY dollar index posted a high at 90.19, having lifted from a six-week low at 89.94. EUR-USD concurrently pulled back under 1.2150 after an earlier run higher capped out at 1.2179, while USD-JPY lifted above 105.30 after earlier pegging an eight-day low at 104.93. The pound outperformed, lifted by perky Gilt yields following the latest UK labour market report showing drop in jobless claims and a 4.7% y/y rise in average household incomes. This comes hot on the heels of the presentation of the government's roadmap to opening UK society back up, which could be fully open by mid-June following a four stage process (subject to review). Cable posted a new 34-month high at 1.4098, while the pound edged out an 11-month high against the euro and a 23-month peak versus the yen. The Australian dollar and other dollar bloc and cycle currencies corrected. Even the Canadian dollar failed to make headway despite oil prices rallying to new 13-month highs, although crude markets subsequently settled lower. Bitcoin saw more hyper-whippy price action, and was showing a near 16% intraday loss as of the late London morning, trading at sub-$46,000 levels. The low at $45,542 marked a near 22% dive from the record high that was seen on Sunday (note that cryptocurrencies trade seven days a week).

    [EUR, USD]
    EUR-USD has pulled back under 1.2150 after an earlier run higher capped out at 1.2179. The correction is largely the cause of a firmer dollar, which has picked up some bids following a four consecutive trading day drift lower. A fresh drop in European stock markets and U.S. equity index futures has revived the dollar as a safe haven it seems, especially with the recent divergence between base metal price and equity markets ending, with most commodity prices now turning lower in synchrony with stocks. The steep drop in bitcoin and other cryptocurrencies can also be attributed to the firming in the greenback, along with the recent shift in yield differentials, which has been dollar favourable versus the euro, along with the yen and others (although not in the case against the pound and dollar bloc currencies). Fed chair Powell is set to deliver, later today, an unwavering dovish testimony before the Senate Banking Committee today. As we have been remarked, the upcoming massive $1.9 stimulus spending in the U.S. economy alongside rising Treasury yields should limit the greenback's downside potential, which in turn should curtail EUR-USD's upside. Eurozone economies are also lagging behind the U.S and UK in their Covid vaccination programs, which is likely to see economy-crimping societal restrictions remain longer in the Eurozone.

    [USD, JPY]
    The yen has pulled back from lows over the last day. The wobble in global equity markets elicited some positional adjustment. USD-JPY, aided by broader dollar weakness, posted an eight-day low at 104.93, although subsequently lifted amid a rebound in the dollar (fuelled in part by a sharp drop in cryptocurrencies). At the same time, some yen crosses drifted off the major trend peaks that were seen yesterday, though GBP-JPY has been a notable exception, rising to fresh 23-month highs. The yen had been underperforming lately in synchrony with JGB yields conspicuously lagging a long way behind the steep yield rises of other sovereigns.

    [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 1.4098. UK labour data covering December-January period, released earlier, showed unemployment lifted to 5.1% from 5.0%, as expected, but a sharp 4.7% y/y rise in average household income in the three months to January drove a fresh lift in UK yields. The pound also edged out an 11-month high against the euro, and a 23-month peak versus the yen. The UK's ahead-of-the-pack Covid vaccine program has been giving the undervalued pound an underpinning. Prime Minister Johnson yesterday outlined a roadmap to lifting Covid restrictions, which, as expected, is 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 a sucessful reopening. A sharp focus will remain on the various new, highly transmissible variants of the SARS-Cov2 coronavirus, 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 has been plying a narrow range just above the 35-month low that was seen yesterday at 1.2579.The Canadian dollar has in the meanwhile lost ground to other currencies, including the euro and yen, over the last day, though we anticipate declines to be limited given the buoyancy of oil prices. Front-month WTI oil futures posted a fresh 13-month high at $62.99, and are now showing a near 30% gain on the year so far, which marks a substantial improvement the terms of trade of the Canadian economy. The supply-gap oil supercycle theses remains strong in market narratives, with many predicting prices at $100, fuelling by demand stimulation caused by the upcoming massive stimulus in the U.S. and, to a lesser extent, the EU. The anticipation of a return to societal norms on the back of Covid vaccination progams, and the lifting of travel restrictions, go hand-in-hand with this view. We habour doubts about this view, but for now it is likely to remain in the ascendant.

    Paste link in email or IM