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By XE Market Analysis June 8, 2020 7:41 am
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    XE Market Analysis: North America - Jun 08, 2020

    The dollar majors have remained in narrow ranges so far today, despite the continuing positive vibe from Friday's unexpectedly encouraging U.S. May employment report. The data added fuel to the view that the global economic rebound from the pandemic nadir in April will be solid. A key question now, especially with many asset prices trading at pre-pandemic levels, is how sustainable social and economic reopening will be; how able will societies be able to keep the coronavirus under sufficient check until such time there is a vaccine or effected treatment. Already the R-rate of infection in a number of states in the U.S., and a number of spots across Europe and elsewhere, is above 1, meaning that new infections of the coronavirus are rising, again, at an exponential rate. The narrow trade-weighted USD index is near net unchanged, just under the 97.0 level, holding above the three-month low that was seen on Friday at 96.44. Recent declines in the dollar, and yen, have reflected a rotation of speculative and investment capital out of safety and into higher-risk assets and currencies. EUR-USD has settled near 1.1300, below Friday's three-month high at 1.1385, which was the culmination of a two-week rally from levels near 1.0900. USD-JPY has settled near 109.50, below the 10-week high seen on Friday at 109.86. Sterling ebbed back a little after today seeing its highest opening against the euro since mid May. News from the UK-EU trade negotiation front weighed on the pound, specifically the decision by EU fisheries ministers not to change course on their position -- to maintain the "status quo", as the EU's chief negotiator Barnier put it.

    [EUR, USD]
    EUR-USD has settled near 1.1300, below Friday's three-month high at 1.1385, which was the culmination of a two-week rally from levels near 1.0900. The rally reflected part broad dollar weakness, but also part euro outperformance, which was aided by developments on extra fiscal stimulus on the Eurozone side of the pond. 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]
    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]
    Sterling ebbed back a little after today seeing its highest opening against the euro since mid May. News from the UK-EU trade negotiation front weighed on the pound, specifically the decision by EU fisheries ministers not to change course on their position -- to maintain the "status quo", as the EU's chief negotiator Barnier put it. This "skewed things late in the process," according to a Downing Street source cited by the Guardian. Fishing rights has been the single issue that has taken up more negotiating time than any other, reportedly, over the last week of talks. London is frustrated by Barnier's inability, thus far, to convince various member states to look for a compromise. The UK is insisting, not unreasonably, that it will be an independent coastal state, and that there needs to be a new relationship with the EU with regard to fishing, pointing to Norway as a working example. The EU, on the other hand, wants to emulate the common fisheries policy (CFP), under which fishing quotas are agreed at an annual negotiation. This is a major issue for the UK, which ran large in the pro-Brexit campaign. The UK government, for instance, points out that the scheme has led to France having 84% of the cod quota in the English Channel. The EU is now expecting the talks to drag on until October, regardless of whether the UK asks for an extension of its post-Brexit transitory access to the single market (which it has to decide on by July 1st). Ahead, unless there is a breakthrough in trade negotiations, the pound's upside potential is likely to remain limited.

    [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. Front-month WTI crude prices printed a fresh three-month peak at $40.44 today, which follows the formal agreement of the OPEC+ group to extend prevailing quotas for an extra month. 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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