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By XE Market Analysis June 4, 2020 7:05 am
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    XE Market Analysis: North America - Jun 04, 2020

    The dollar and yen lifted today, benefiting from a correction in recent risk-off positioning in currency markets. This has seen both the dollar and yen recover some lost ground versus most other currencies, with the commodity currency group now playing an underperforming role. S&P 500 futures were showing a 0.6% loss heading into the Wall Street open. European bourses fell, and in Asia-Pacific, markets mostly posted moderate gains while the main Chinese and Hong Kong indices tipped into the red. There hasn't appeared to be any specific market-jolting news catalyst, rather a case of altitude sickness with many assets having reached levels seen before the pandemic. The narrow trade-weighted USD index lifted to a two-day high at 97.63, nearly 40 pips up on yesterday's near-three-month low. EUR-USD concurrently dipped back under 1.1200, putting in a little distance from yesterday's near-three-month high at 1.1257. Cable followed suit, and posted a two-day low at 1.2501, falling by over a big figure from the one-month high that was seen yesterday at 1.2616. USD-JPY floated to a fresh two-month high at 109.15, despite the Japanese currency concurrently strengthening against most other currencies. This biggest mover has been AUD-USD, which shed 0.5% in printing a low at 0.6884, setting the pair up for what could be its first down day in over a week. The Canadian dollar and other units in the oil-correlating commodity subgroup also came under pressure, with front-month WTI futures ebbing by around 2%, correcting after making a three-month high yesterday at $38.17. USD-CAD lifted back above 1.3500 after yesterday posting a three-month low at 1.3478. In developments, the U.S. looks likely to label China as a currency manipulator, and has announced restrictions on additional Chinese media outlets. The EU-China summit planned for September has been cancelled, with the coronavirus pandemic being cited as the reason. Brazil affirmed is position as the new coronavirus hotspot, recording a new daily record Covid-19 deaths of 1,349. In the UK, amid a round of trade talks with the EU, Rolls-Royce announced 3,000 job cuts.

    [EUR, USD]
    EUR-USD dipped back under the 1.1200 level, putting in a little distance from yesterday's near-three-month high at 1.1257. The high was seen yesterday following news that a German stimulus package had been agreed to, though directional impulses over the recent period has mostly been driven by broader moves in the dollar. Today, so far, has been no exception, with the dollar rebounding from recent weakness and driving EUR-USD lower. The narrow trade-weighted USD index lifted to a two-day high of 97.63, which is up by nearly 40 pips from yesterday's near-three-month low. Recent gains have returned the pair to levels that were prevailing well 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 have the potential to return the dollar's role as a safe haven. One is the simple fact that economies aren't likely to fully recover under virus-containing social distancing rules and with the threat of there being renewed lockdowns, which means that asset markets, many of which are trading back at levels seen before the pandemic took a grip, could now be ripe for setbacks. Also, there is a risk that bankruptcies will soar once government business and pay support schemes fall away. Then there is the issue of deteriorating U.S.-China tensions.

    [USD, JPY]
    The yen has rebounded from recent weakness against most other currencies today. The dollar has been the main exception, which has lifted USD-JPY to a fresh two-month high at 109.15. The commodity currencies have been the biggest decliners, correcting form recent trend highs. This comes with global stock markets sputtering. There hasn't appeared to be any specific market-jolting news catalyst, rather a case of altitude sickness with many assets having reached levels seen before the pandemic. We have been highlighting outlook risks, which have the potential to return safe-haven demand to the yen. While many asset classes have recouped to pre-crisis levels, economies aren't likely to fully recover under social distancing rules and with the threat of there being renewed lockdowns. There is also a risk that bankruptcies will soar once government business and pay support schemes fall away, while U.S.-China tensions could still prove to be disruptive, especially if it spills over to trading relations (as is starting to look likely)

    [GBP, USD]
    Cable posted a two-day low at 1.2507, which is down by over a big figure from the one-month high that was seen yesterday at 1.2616. In UK news, and amid the latest round of trade talks with the EU, Rolls-Royce announced 3,000 job cuts due to the bleak outlook in its aviation engine-making business. Regarding the UK-EU trade situation, the BoE has reportedly warned UK banks to be ready for a no-deal Brexit. As per the Sky News Twitter (yesterday): "City sources say the Bank of England governor Andrew Bailey has told banks to step up plans for the UK to leave the EU without a trade deal." This comes at a significant juncture, with the final round of UK-EU trade negotiations having commenced yesterday before the July-1st deadline the two sides have set themselves before deciding that the UK can extend its post-Brexit access to the EU's customs union and single market beyond the end of this year. The UK government has being playing hardball, saying that it is quite prepared to walk away without a deal, even though this would imperil the majority of UK trade to much-less-favourable WTO terms from January-1st 2021, which is the scenario the BoE is warning about. Last week, officials from both sides said that a deal was looking unlikely, though sources cited by the London Times at the weekend said that the UK was willing to compromise, though on the proviso that the EU backs off from its "maximalist" demands on regulatory alignment and fishing access. Our hunch is that the UK will either reach and agreement with the EU, or ask for an extension. If we're right, this would be bullish for the pound, which has factored in the risk of the UK leaving without a deal (the crystallisation of a hard Brexit) in 2021. We would foresee Cable trading back above 1.3000 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]
    The Canadian dollar and other currencies in the oil-correlating commodity subgroup have come under moderate pressure, correcting from recent gains, with front-month WTI futures ebbing by over 1.5%, correcting after making a three-month high yesterday at $38.17. USD-CAD lifted back above 1.3500 after yesterday posting a three-month low at 1.3478. The outlook for oil prices, and by association the Canadian dollar, remains bullish, especially as oil is one asset class that remains some way below its pre-pandemic peak. The latest weekly U.S. API crude inventory data showed an unexpected draw, of 500k barrels in the week to May 29th. While small, this was unexpected, and fits the picture of a shifting demand-supply balance as reopening economies drive demand up with markets anticipating the OPEC+ group to extent the prevailing below-capacity output quotas through to September 1st.

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