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By XE Market Analysis February 25, 2021 6:54 am
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    XE Market Analysis: North America - Feb 25, 2021

    The dollar remained under pressure, which drove the DXY index to seven-week lows under 89.75, as markets continued to react to Fed Chair Powell's attempt to convince markets that the punch bowel of monetary stimulus isn't going to be taken away anytime soon, even in the face of rising inflation. On the day, the biggest currency gainers have been the dollar bloc, though other commodity-correlating cyclical currencies have seen lacklustre performance today, including the South African rand and Mexican peso, despite firmer commodity prices. The yen has remained a conspicuous underperformer, posting fresh major long-term lows against the likes of the euro, sterling and the dollar bloc currencies, and an eight-day low in the case against the greenback. Dollar weakness saw EUR-USD lifted above 1.2200 for the first time since mid January. Base metals are up again, with copper punching out fresh 10-year highs. Oil prices also hit new 13-month highs.

    [EUR, USD]
    EUR-USD lifted above 1.2200 for the first time since mid January, with the pair floated by a broad weakening in the dollar following Fed Powell's testimony before the House yesterday, while largely repeat of the Senate testimony the day before, seemed to have greater impact damping down yields. The 10-year T-note yield ebbed back under 1.40% after earlier hitting one-year-plus highs above here. The Dow vaulted to a new record high on Wall Street, while the dollar weakened. Inflation being allowed to run higher (more than in former cycles under the prevailing policy rubric), without accompanying monetary tightening, is bearish for the dollar, as it implies loosening in the real interest rates and in real Treasury yields, at least in so far as it contrasts the circumstance in other economies, as appears to be in the case of the Eurozone, where the prevailing inflation rate is lower than the U.S.

    [USD, JPY]
    The yen has remained the biggest loser in the context of the ongoing reflation trade, posting fresh major long-term lows today against the likes of the euro, sterling and the dollar bloc currencies, and an eight-day low in the case against the otherwise weak dollar. The yen had been underperforming in synchrony with JGB yields conspicuously lagging a long way behind the steep yield rises of other sovereigns.

    [GBP, USD]
    The pound has remained firmly in the outperforming lane of currencies this week, posting a 36-month high at 1.4234 against the dollar while hitting respective one-year and 33-month highs versus the euro and yen. The Telegraph newspaper yesterday reported British government sources saying that Covid restrictions could be lifted sooner than laid out in PM Johnson's roadmap, which was outlined earlier in the week, if "real world data on the effect of vaccines is better than expected." So far the data has been encouraging, and the UK's ahead-of-the-pack vaccine rollout has been bullish factor for the pound. Studies in the UK have already shown that the vaccinations slash risk of infection, illness and death from SARS-Cov2. The UK economy and the pound underperformed peers during the height of the first lockdowns last year, and the vista of reopening has been having the opposite effect, especially with Brexit uncertainty having finally ended. We anticipate further upside. The pound, as measured by the BoE's real effective exchange rage, remains about 6% down on the levels that were prevailing just ahead of the Brexit referendum on 23 June 2016. One salient question is how well the UK economy is faring on this side of Brexit. There are many reports of disruption at borders and in trade with the EU compared to life as a member of the single market and customs union, but there hasn't been any significant shortages in goods while the preliminary February PMI surveys pointed to a marked improvement in private sector economic activity despite the UK nations enduring Covid lockdowns (which the University of Oxford ranks as the fourth most restrictive in the world currently, after Ireland, Eritrea and Cuba). Since leaving the common markets consumer prices have declined, sterling is up, as are UK stock markets, including small cap stocks of domestically oriented companies.

    [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 posted a three-year low at 1.2473, aided lower by a narrowing in the U.S. yield advantage over the Canadian yields over the last day at the 10-year and other maturities, alongside another rise in oil prices to new 13-month highs. At the same time, CAD-JPY traded above the 85.00 level for the first time since March 2019, while the Canadian dollar yesterday saw a nine-month high versus the euro. Front-month WTI oil futures sprinted from sub-$60 level to a new 13-month high at $63.79. Crude prices are now showing a near 31% 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, underpinned by demand stimulation caused by the upcoming massive stimulus in the U.S. and EU. The anticipation of a return to societal norms on the back of Covid vaccination programs, and the lifting of travel restrictions, go hand-in-hand with this view. We habor doubts about this, but for now it is likely to remain in the ascendant. Rising U.S. supply and potential for a weakening in discipline amid the OPEC+ group to maintain supply quotas may offset rising demand. In terms of 'known unknown' risks, to use epistemological phraseology, include new more transmissible SARS-Cov2 coronavirus variants that prove resistant to current vaccinations, or perhaps another clash between Saudi Arabia and Russia on oil production quotas. The OPEC+ group meet on March 3rd-4th to decide on April quotas, with Moscow reportedly calling for a relaxation.

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