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By XE Market Analysis June 9, 2020 6:42 am
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    XE Market Analysis: North America - Jun 09, 2020

    The yen rallied and the commodity currencies corrected as risk appetite turned sour. The dollar also gained versus most currencies, though still underperformed the yen. The risk-sensitive AUD-JPY led the way, racking up a 2% intraday loss, while AUD-USD dove by 1.5%. Lofty levels, with AUD-JPY last week reaching a 13-month high, and AUD-USD hitting an 11-month peak in early trade today, encouraged profit taking. Yen outperformance drove USD-JPY to sub-108.00 levels from levels around 109.50 that were seen this time yesterday. EUR-JPY was showing a decline over 0.6%, as of the early London afternoon. With oil prices and many asset prices trading at levels last week well before the pandemic crisis and consequent lockdowns took hold, there seems to be increasing "be wary" narratives. Credit Suisse, for instance, is not atypical in anticipating that it will take another two years to return to pre-virus levels of GDP. Central bank stimulus may have peaked, too. The Fed is widely expected to leave policy unchanged at its meeting this week. We think further rate cuts into negative territory are off the table, given substantial internal and public opposition for now. Also in the mix today has been news that North Korea cut communication lines with South Korea. Despite the risk-wary evolution in Europe, the MSCI Asia-Pacific equity index gained over 1% today in making a three-month peak, which followed the Nasdaq index on Wall Street yesterday hitting a record high. European stocks and U.S. index futures subsequently turned lower. S&P 500 futures fell by over 1%. Elsewhere, EUR-USD drifted to a five-day low at 1.1242 as the narrow trade-weighted USD index lifted to a high of 97.06, which is 1 pip shy of yesterday's peak. USD-CAD lifted to a four-day high at 1.3488, which seen with oil prices correcting some 8% from yesterday's three-month peak.

    [EUR, USD]
    EUR-USD has drifted moderately lower, weighed on by a general softening in the dollar and a fairly steep, 0.6%-plus, decline in EUR-JPY. Both the dollar and yen have been picking up safe haven demand as stock markets correct across European bourses, and with U.S. equity index futures following suit. Lofty prices and a 24% dive in German April exports catalysed the sentiment shift. The narrow trade-weighted USD index lifted to a high of 97.06, which is 1 pip shy of yesterday's high, while EUR-USD concomitantly ebbed to a five-day low at 1.1242. The Fed is widely expected to leave policy unchanged at its meeting this week (announcing tomorrow). We think further rate cuts into negative territory are off the table, given substantial internal and public opposition for now. This could help the dollar find its legs, especially if the stock market correction persists. The bigger focus remains 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 in the coming months, and risks associated from U.S.-China tensions.

    [USD, JPY]
    Yen crosses, led by risk-sensitive AUD-JPY, have come under pressure as lofty levels -- AUD-JPY posted a 13-month last week while AUD-USD today hit an 11-month peak -- encouraged profit taking. AUD-JPY doev by 2%, while yen outperformance drove USD-JPY to sub-108.00 levels from levels around 109.50 that were seen this time yesterday. EUR-JPY was showing a decline over 0.6%, as of the early London afternoon. With oil prices and many asset prices trading at levels last week well before the pandemic crisis and consequent lockdowns took hold, there seems to be increasing "be wary" narratives. Credit Suisse, for instance, is not atypical in anticipating that it will take another two years to return to pre-virus levels of GDP. Central bank stimulus may have peaked, too. The Fed is widely expected to leave policy unchanged at its meeting this week. We think further rate cuts into negative territory are off the table, given substantial internal and public opposition for now. Also in the mix today has been news that North Korea cut communication lines with South Korea. Despite the risk-wary price action in currencies, the MSCI Asia-Pacific equity index gained over 1% today in making a three-month peak, which followed the Nasdaq index on Wall Street yesterday hitting a record high. European stocks and U.S. index futures subsequently turned lower.

    [GBP, USD]
    The pound has taken a turn lower, racking up a 0.5% loss to the dollar and about a 1% decline versus the yen, while also softening against the euro. The backdrop of sliding stock markets in Europe has weighed on the UK currency, which has established a pandemic-era proclivity to underperform its main currency peers during risk-off periods. Attention also remains on the UK-EU trade negotiation front. 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, has "skewed things late in the process," according to a Downing Street source cited by the Guardian. London is frustrated by Barnier's inability, thus far, to convince various member states to look for a compromise. The UK is insisting 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). 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 currencies in the oil-correlating commodity subgroup have come under pressure. This saw USD-CAD lift to a four-day high at 1.3488, setting the pair up for what could be its first up-day of June and extending a rebound from yesterday's three-month low at 1.3354. Front-month WTI prices are down 2.3% at $37.30, which is nearly 8% down on yesterday's high at $40.44. The decision by the OPEC+ group to extend prevailing output quota limits for another month has been factored in.

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