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By XE Market Analysis June 5, 2020 7:07 am
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    XE Market Analysis: North America - Jun 05, 2020

    The dollar picked up bids following remarks from China's foreign secretary, who said that Beijing will take "countermeasures" against 33 U.S. entities. This sparked demand for the dollar as risk sentiment soured, causing a dip-from-highs in S&P 500 futures. The narrow trade-weighted USD index has lifted back above 96.80 after printing a fresh near-three-month low at 96.44, which made this the eighth consecutive day the dollar has made a lower low. EUR-USD concurrently ebbed back to the lower 1.1300s during the London AM session after earlier making a near-three-month high at 1.1384. Cable also fell back from highs, as did AUD-USD, which had been amid another strongly bullish session, which had been concomitant with the MSCI Asia-Pacific equity index posting its biggest weekly gains since 2011. The U.S. currency remains down on the week by 1.7%. The Chinese news, coupled with the approaching U.S. jobs report and weekend, makes the dollar ripe for a rebound. The May U.S. employment report is up today, and is expected to show a moderation in the sharp rate of job losses, though the report won't tell investors much what they don't already know, in markets that remain somewhat deadened to fine-tuning expectations on data. The Canadian dollar and other oil-correlating currencies have remained underpinned. USD-CAD has remained heavy printed a new three-month low at 1.3459. Reports affirmed that the OPEC+ groupd has ratified an extension in prevailing quotas for an extra month lifted front-month WTI crude prices to a fresh three-month peak, at $38.37.

    [EUR, USD]
    EUR-USD ebbed back to the lower 1.1300s during the London AM session after earlier making a near-three-month high at 1.1384. The price dynamic was driven by the dollar picking up bids following remarks from China's foreign secretary, who said that Beijing will take "countermeasures" against 33 U.S. entities. This sparked demand for the dollar as risk sentiment soured, causing a dip-from-highs in S&P 500 futures. The narrow trade-weighted USD index has lifted back above 96.80 after printing a fresh near-three-month low at 96.44, which made this the eighth consecutive day the dollar has made a lower low. The U.S. currency remains down on the week by 1.7%. The Chinese news, coupled with the approaching U.S. jobs report and weekend, makes the dollar ripe for a rebound. The May U.S. employment report is up today, and is expected to show a moderation in the sharp rate of job losses, though the report won't tell investors much what they don't already know, in markets that remain somewhat deadened to fine-tuning expectations on data.

    [USD, JPY]
    USD-JPY edged out a fresh two-month high, at 109.39, floated by yen underperformance. The biggest movers have been AUD-JPY and NZD-JPY. AUD-JPY posted its highest level since May last year. The yen's weakness reflected an unwinding in its safe-haven premium. The MSCI Asia-Pacific equity index is set to close out today with its biggest one-week rally since 2011, with markets taking faith that reopening countries are managing to do so without causing a second-wave of coronavirus infections, while monetary and fiscal stimulus courses through major global economies. Reports that OPEC+ has ratified an extension in prevailing quotas for an extra month is also in the mix as a supportive factor for equities and oil-correlating currencies, although this is by now well anticipated. 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]
    The pound has been in rally mode against the dollar and most of its peers outside the cases for higher beta currencies, such as the Australian dollar. Sterling's pandemic-era proclivity to correlate with global stock market direction has again been in evidence this week. Cable today posted a near-three-month high at 1.2689. A crucial round of trade discussions between the UK and EU has been ongoing this week, being the final round 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. A press conference, or at least a statement, is likely to come later today. Prime Minister Johnson will reportedly meet with European Commission President von der Leyen later this month. The BoE has reportedly warned UK banks to be ready for a no-deal Brexit. 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, 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]
    Recent euro gains have been a boon to EUR-CHF, which is now trading at its best levels of the year, above 1.0850. The SNB had been defending an informal line-in-the-sand at 1.0500 since early March in an effort to limited franc appreciation and, thereby, disinflationary forces on the Swiss economy.

    [USD, CAD]
    The Canadian dollar and other commodity- and oil-correlating currencies have remained underpinned amid the prevailing appetite for risk that has been coursing through global markets. USD-CAD printed a new three-month low at 1.3459. Reports that OPEC+ has ratified an extension in prevailing quotas for an extra month is in the mix of sentiment-influencers today, although this is by now well anticipated. Front-month WTI crude prices printed a fresh three-month peak at $38.37. Both the U.S. and Canada will release their May employment reports, with expected to paint a dismal picture, although with a markedly diminished rate of job losses versus that seen during April's nadir. We don't anticipate the data having much impact on USD-CAD. Bigger picture, as long as the nascent recovery isn't scuttled by a second wave of coronavirus infections, oil price risk going forward would appear to be to the upside, which in turn should keep the Canadian dollar underpinned.

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