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By XE Market Analysis June 1, 2020 7:31 am
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    XE Market Analysis: North America - Jun 01, 2020

    The dollar and yen reversed course and picked up safe haven demand after China upper the ante in its game of risk with the U.S. by withdrawing purchases for some American farm products, according to a Bloomberg report. The likes of EUR-USD, Cable and AUD-USD consequently turned lower. EUR-USD ebbed back to near the 1.1100 mark, after earlier printing a high at 1.1153, which is the highest level seen since March 17th. The yen, like the dollar, also saw a seen a weakening-then-strengthening price action. There had initially been relief in markets that U.S. President Trump left the trade deal with China intact as he outlined on Friday measures against China, which was in response to Beijing's ratification of the controversial Hong Kong security law. But, then there was news of China's move, which switched markets from a risk-on to a risk-off mode. USD-JPY held steady in a narrow range in the mid-to-upper 107.00s, while the yen rallied against most other currencies, particularly the commodity currencies. AUD-JPY gave back more than half of its earlier gains. The cross had been showing an intraday gain of nearly 1.5% at its high, which was its loftiest level since late February. Aside from U.S.-China tensions, there are other risks ahead. Economies aren't likely to fully recover under social distancing rules and with the threat of there being renewed lockdowns (witness South Korea). Also, there is a risk that bankruptcies will soar once government business and pay support schemes fall away.

    [EUR, USD]
    EUR-USD has turned lower as the dollar picked up a degree of demand as stock markets sank in Europe after a solid gain across most Asia-Pacific markets, a backdrop that had seen the U.S. currency weaken. The pair has ebbed back to near the 1.1100 mark, after earlier printing a high at 1.1153, which is the highest level seen since March 17th. A Bloomberg report, citing unnamed sources, that Beijing has told major state-run agricultural to halt purchases of some U.S. produce, including soya beans, has rattled markets. S&P 500 futures dipped into the red, while commodity currencies have pared gains and demand for the currency safe havens of the dollar and yen has picked up. Taking a step back, the recent gains in EUR-USD has returned the pair to levels that were prevailing ahead of the pandemic crash in March. The focus is now on economic reopenings on both sides of the Atlantic, and globally. There are risks ahead, which may keep the dollar's role as a safe haven in play, and so limit EUR-USD's upside potential. Economies aren't likely to fully recover under social distancing rules and with the threat of there being renewed lockdowns (witness South Korea). Also, there is a risk that bankruptcies will soar once government business and pay support schemes fall away. Then, of course, and as we have seen today, is the issue of deteriorating U.S.-China tensions.

    [USD, JPY]
    The yen has seen a weakening-then-strengthening price action so far today. There had initially been relief in markets that U.S. President Trump left the trade deal with China intact as he outlined on Friday measures against China following its ratification of the controversial Hong Kong security law. But, then there was news that China has halted the imports of some U.S. farm goods, which has switched markets from a risk-on to a risk-off mode, and rekindled safe haven demand for the yen. A Bloomberg report, citing unnamed sources, said that Beijing has told major state-run agricultural agencies to halt purchases of some U.S. produce, including soya beans. The move threatens the U.S.-China trade deal. USD-JPY held steady in a narrow range in the mid-to-upper 107.00s as the dollar also picked up a bid as a safe haven, while the yen rallied against most other currencies, particularly the commodity currencies. AUD-JPY gave back more than half of its earlier gains. The cross had been showing an intraday gain of nearly 1.5% at its high, which was its loftiest level since late February. Aside from U.S.-China tensions, there are other risks ahead, which may keep the yen's role as a safe haven in play. Economies aren't likely to fully recover under social distancing rules and with the threat of there being renewed lockdowns (witness South Korea). Also, there is a risk that bankruptcies will soar once government business and pay support schemes fall away.

    [GBP, USD]
    Cable dropped back after earlier rallying by nearly 0.5% in posting a three-week peak at 1.2425. The decline reflected a safe haven bid for the dollar after China upper the ante in its game of risk with the U.S. by withdrawing purchases for some American farm products. Bigger picture, the pound has recovering from weakness that was seen in May, which came amid speculation that the BoE is heading for negative rates, and so join the ECB's and SNB's club. The next BoE Monetary Policy Committee meeting is on June 17th-18th. We don't expect the central bank 'go negative' at this juncture, based on recent signalling by BoE members, with social and economic reopening, domestically, in Europe and across the world, driving a rebound from depressed levels in the UK economy. Much will depend on how successful the reopenings are without sparking a further lockdown. For now, the BoE will remain in wait-and-seen mode. Another pressing issue in the UK is the trade negotiations between the UK and EU, with only one more round left until the UK must decide if it wants to extend its post-Brexit access to the EU's customs union and single market beyond the end of 2020. There remains a possibility that the UK will leave the EU's single market at year-end. Things will be decided by the EU's leaders summit in mid June, ahead of the July-1sy deadline. Our hunch, which is not the market consensus, is that the UK will either reach and agreement with the EU, or ask for an extension, despite threats to leave without a deal (which is clearly a negotiation tactic). If we're right, this would be bullish for the pound, especially if the BoE also refrained from negative interest rates. A return to levels above 1.3000 in Cable would be a likely in this scenario.

    [USD, CHF]
    The SNB has successfully been putting a cap on the franc, which has seen EUR-CHF in recent weeks skirt along just above the five-year low that was first seen on March 9th at 1.0505 without breaching it. Weekly sight deposit data out of Switzerland has pointed to the extent of SNB franc selling over the pandemic crisis period, which was most acute in March before basing out as global governments and central banks acted with interventions and stimulus packages. A rise in sight deposits (money held by commercial banks) can suggest the francs turning up after being sold by the central bank. The 1.0500 level in EUR-CHF, while not a fixed floor, has clearly been a line in the sand of the SNB. The Swiss central bank has a long history of intervening to either limit of slow the pace of appreciation in its currency, which normally comes during periods of risk aversion in global markets and/or euro underperformance. From 2011 through to 2015, the SNB capped the franc via a 1.2000 floor in EUR-CHF. When the cap was abandoned in January 2015, the franc rallied by 30%, having become unfeasible for the SNB to counter the ECB's expansive monetary policies. A similar circumstance is afoot today, with the ECB maintaining expansive polices following a period of safe haven demand for the franc. In January, the U.S. added Switzerland to its list of currency manipulators. The move seemed a bit harsh given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argued that Switzerland should pursue a more expansive fiscal policy as a remedy.

    [USD, CAD]
    USD-CAD has remained in a consolidation of recent losses, which on Wednesday left an 11-week low at 1.3725. At the same time, oil prices have been consolidating recent gains, which has taken some of the wind out of the Canadian dollar's sails. The Canadian currency, likely other commodity currencies and risk assets, is also back to levels prevailing before the global market panic of mid March. This should give market participants pause for thought, as reopening economies are only doing so only partially, and there is a risk for a second wave of coronavirus infections as social and economic re-liberalization unfolds (witness the spike in cases in South Korea, which has led to a re-introduction of lockdown measures). As for oil prices, front-month WTI crude futures have tipped lower after pegging an 11-week high on Tuesday at $34.81. The outlook for oil is still bullish. OPEC+ adherence to planned production cuts is reportedly high, although Russia is desiring to increase output in July. U.S. output continues to fall amid the forced closure of hundreds of shale wells, with current pricing making such operations unviable. On the demand side, China and India are said to be increasing imports, while fuel use in general has been on the rise as economies emerge from lock down. Bigger picture, as long as the nascent recovery isn't scuttled by a second wave of COVID-19 infections, oil price risk going forward would appear to be to the upside.

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