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By XE Market Analysis February 26, 2021 7:25 am
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    XE Market Analysis: North America - Feb 26, 2021

    The dollar and yen rallied as a risk-off theme coursed through global markets, with equity markets, commodities, including base metals and oil, all tumbling. The sharp spike in U.S. and most other sovereign yields this week and the associated concerns about inflation have driven the correction in risk assets and currencies. We maintain that sovereign yields are lifting out of exceptionally low levels, that rising yields and interest rates are par for the course in major bull markets in equities by historic standards, and that the prospect of higher corporate earnings can still carry equities higher. But for now, the prevailing bias is a risk-off one, although Treasury yields have dropped back quite sharply from highs today. In the mix today has been news of a U.S. airstrike in Syria against infrastructure used by Iranian-backed militia, which was reportedly in response to recent Iranian attacks on U.S. interests in Iraq. The DXY dollar index rallied over 0.7% in posting an eight-day high at 90.77, while EUR-USD concurrently dropped to a four-day low at 1.2093. Cable plunged to eight-day lows under 1.3900. The Australian and New Zealand dollars underperformed, not surprisingly, having been outperformers during the risk-on times. AUD-USD dove over 1.5% in printing an eight-day low at 0.7731. USD-CAD lifted to a one-week peak at 1.2685, extending the sharp rebound out of yesterday's three-year low at 1.2466. The yen, meanwhile, has been the biggest loser gain, outperforming even the dollar so far today as its traditional role as a haven currency become re-established. USD-JPY dropped from a six-month high at 106.43 to a low at 105.86. Bitcoin has hit a low so far just above $44,000, which is nearly 15% down on yesterday's high and some 25% down on the record peak that was seen earlier in the week. Arguments by crypto advocates that bitcoin is a hedge against inflation have evidently been found wanting.

    [EUR, USD]
    EUR-USD dropped to a four-day low at 1.2093, and EUR-JPY also dropped with both the dollar and yen picking up safe haven demand amid a risk-off positioning phase in global markets. The euro has fared better against other currencies, rising to 10-day highs versus the pound, and gaining on the dollar bloc currencies, for instance.

    [USD, JPY]
    The yen has rallied amid a coursing risk-off theme in global markets, with equity markets, commodities, including base metals and oil, all tumbling. The sharp spike in U.S. and most other sovereign yields this week and the associated concerns about inflation have driven the correction in risk assets and currencies. We maintain that sovereign yields are lifting out of exceptionally low levels, that rising yields and interest rates are par for the course in major bull markets in equities by historic standards, and that the prospect of higher corporate earnings can still carry equities higher. But for now, the prevailing bias is a risk-off one, although Treasury yields have dropped back quite sharply from highs today. In the mix today has been news of a U.S. airstrike in Syria against infrastructure used by Iranian-backed militia, which was reportedly in response to recent Iranian attacks on U.S. interests in Iraq. USD-JPY dropped from a six-month high at 106.43 to a low at 105.86. Yen crosses dropped sharply out of trend highs in synchrony, with AUD-JPY, for instance, diving by over 3% from the three-year high the cross saw yesterday. The yen's performance should continue to derive from the level of risk appetite in global markets. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency.

    [GBP, USD]
    Cable retreated back under 1.4000 on route to pegging an eight-day low at 1.3888. At the same time the pound has lost ground to the yen, and has lifted to 10-day highs in the case against the euro. A risk-off positioning theme in global markets has pushed the UK currency into the underperforming lane, having hitherto been outperforming. We remain bullish due to the UK's ahead-of-the-pack vaccine rollout, which has the potential to see the UK become restriction free by June, assuming the vaccination program remains on track and that new variants don't throw a spanner in the works. 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. The pound, as measured by the BoE's real effective exchange rage, remains about 7% 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). Other metrics also offer encouragement since leaving the common market, with consumer prices having declined, sterling gaining, as have been 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 lifted to a one-week peak at 1.2685, extending the sharp rebound out of yesterday's three-year low at 1.2466. The Canadian dollar has also lost ground to the yen amid risk-off positioning, and with base metals and oil prices correcting. Front-month WTI oil futures dropped to a correction low at $62.55, down on yesterday's 13-month peak at $63.81. Crude prices are still showing about a 30% gain on the year so far, which marks a substantial improvement the terms of trade of the Canadian economy. The supply-gap oil super cycle 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 habour 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, these include more transmissible SARS-Cov2 coronavirus variants that might 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 while the Saudi's want to maintain output at prevailing levels.

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