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By XE Market Analysis June 9, 2021 7:08 am
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    XE Market Analysis: North America - Jun 09, 2021

    Narrow ranges have been prevailing among the dollar majors as key data and events loom. Tomorrow's ECB meeting and U.S. CPI are keenly awaited by market participants, in addition to next week's FOMC meeting. The DXY dollar index has settled nearly the 90.0 level, and has remained within the bounds of yesterday's ranges, as have dollar pairings. EUR-USD, for instance, has plied a range of less than 25 pips so far today, holding just above yesterday's low at 1.2163. Global equity markets have gone static, with the MSCI all-country world index just off record highs, while industrial commodities have been trading mixed so far today. Oil is a standout, posting fresh 32-month highs. The circumstance of the OPEC+ group having last week decided to stick with sub-capacity output for another month, while global demand is picking up, makes for a clear and simple investment thesis. Of note today was news that China's producer prices hit a 12-year high of 9.0% y/y in May due to the surge in commodity prices. Commodity prices are much higher than pre-pandemic levels, which is something that those investors who are not fully buying into the inflation-is-transitory argument have been pointing to. China's May CPI lifted to a still benign 1.3% y/y, however, up from 0.9% y/y in April but missing the median forecast for 1.6% y/y. As for the U.S. and the fate of the dollar, 10-year Treasury yields are pressing on three-month lows below 1.520%. There were reports of safe haven demand for Treasuries yesterday due to the internet outages, but the bigger driver is Fed policy expectations, with the central bank widely seen as staying the course, for now, on ZIRP and QE. There have also been reports of investors buying longer-dated Treasuries for the carry. Despite this, there is a palpable feeling of markets being on tenterhooks. Data yesterday showed U.S. job openings hit fresh record high. These may not be filled for some time as workers have not been returning for various, and by now well documented, reasons -- but when they eventually do, payrolls will rise sharply. As for U.S. May CPI, markets are expecting at 4.7% y/y and 3.4% in the core reading, well above the Fed's 2.0% target. The Fed is expecting inflationary pressures to abate in the latter half of the year and into 2022 as the y/y base effects unwinds, and markets are thus far happy to buy into this. This, along with the markedly higher U.S. inflation rate relative to peers, should keep the dollar on a softening track. But any sign that the Fed might heading for an earlier tapering would shift the dollar onto a firming tack.

    [EUR, USD]
    EUR-USD has plied a range of less than 25 pips so far today, holding just above yesterday's low at 1.2163. The euro has lately been doing well in the popularity stakes (showing gains versus many currencies from month-ago levels), underpinned by the improving economic outlook and the now rapid deployment of Covid vaccinations across the region. Incoming data out of the Eurozone has overall been backing the recovery story, too, and the ratification process behind the 750 bln euro pandemic relief fund is also in the final phases. Amid this backdrop arrives tomorrow's ECB policy review. There is potentially euro-bullish event risk given the possibility that Lagarde will sound less dovish than markets seem to be expecting, as strengthening growth and usually quieter trading conditions over the summer argue for increased flexibility on PEPP purchases going forward. As for the U.S. situation, the unfolding inflation story will be the key determinant of dollar direction and, we think, the direction of EUR-USD. The not-too-hot and not-too-cold U.S. May jobs report didn't shift the needle much, though it did quell the Fed tapering debate, which has seen longer-dated Treasury yields and the dollar rotate lower. Focus is on U.S. May CPI data on tomorrow and next week's FOMC meeting. Whether these had reignite the Fed tapering debate is debatable, but we do see downside risk to EUR-USD -- and potentially significant downside risk -- as and when the Fed looks to be on a path to tightening policy. This would be when the U.S. versus Eurozone growth differential is matched by a Fed versus ECB tightening expectations differential, which would be the circumstance for the directional bias of EUR-USD to shift to the downside.

    [USD, JPY]
    USD-JPY has settled to an orbit of the 109.50 level after turning lower after last week foraying above the 110.00 forthe first time in two months. With the prospect of Fed tapering having been put back to "later" from "sooner" following the May U.S. jobs data, the pronounced U.S. versus Japan inflation differential stands out as a negative dynamic for the nominal level of USD-JPY (aka USD-JPY bearish). But, there are offsetting forces at play, not least of which being the yen's proclivity to inversely correlate with global market stock market direction, which in the latest phase, with the MSCI all-country stock index hitting record highs this week, has been a negative for the Japanese currency. The yen is a low yielding currency of a surplus economy, and tends to weaken during risk-on phases in global markets, and strengthen during times of pronounced and sustained risk aversion. It should be of no surprise that the yen has been the weakest performing of the G10+ currencies during the reflation trade. The Japanese currency, for instance, is registering a loss of over 20% against the Australian dollar from levels seen a year ago, when many of the world's biggest economies were in the grips of 'mother' lockdowns.

    [GBP, USD]
    The pound has traded mixed over the last week, but is registering across-the-board gains versus month ago levels. The UK economy staging a strong rebound from previous lockdown-caused weakness. The UK's May composite PMI, for instance, came in at 62.9 in the headline reading -- new record high for the data series going back to January 1998. The prognosis for the months ahead is looking good. While there has been a creep higher in new Covid cases in the UK, which has caused the prime minister to publicly ruminate that the fourth and final phase of the government's "roadmap" to reopening, scheduled for June 21, might be delayed, there are good grounds to expect this won't develop into a full blown wave. The spread, which is being driven by the Indian variant, is mostly among younger, unvaccinated people, while the the vaccinated majority are proving to be resistant. We retain an overall bullish view on the pound. The UK's main equity indices are replete with globally-focused cyclical stocks, which continue to trade at a discount relative to global peers, and which should benefit as major economies rebound at a time when investors are searching for value. Markets will be on heightened state of alert to incoming policy signalling from BoE MPC members afters Vlieghe said recently that an "early" rate hike was possible, provided there was a smooth transition out of the furlough. The furlough scheme ends no September 30, so Vlieghe's remarks suggest that big decisions on policy will be made after this.

    [USD, CHF]
    Policymakers at the SNB retain a chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

    [USD, CAD]
    USD-CAD has continued to consolidate in a narrow range the rebound high seen last Friday at 1.2134, which is a two-week peak. The U.S. dollar has found its feet after coming under broad pressure from the U.S. jobs report miss. Oil prices, meanwhile, have remained on an upward path. Front-month WTI futures earlier hit a fresh 32-month high at $70.63. The OPEC+ group's agreement last week to maintain production quotas -- ie maintain supply at sub-capacity levels -- despite improving global demand projections has given crude markets a solid fundamental underpinning, which in turn should the oil correlating currencies, such as the Canadian dollar and Norwegian krone, buoyed. The BoC reviews monetary policy this week, and will announce later today. No change to the prevailing 0.25% cash rate is widely expected. The BoC surprised in April by reducing the QE program by $3 bln per week of GoC purchases, which had given the Canadian dollar a boost. While data since then has seen Q1 GDP undershot their expectations, the broad swath of data remains consistent with the recovery outlook. But the labour market is still soft, running well short of its pre-pandemic strength. Also, fresh restrictions weighed on economic activity during April and May, leaving steady-as-it-goes as the most likely outcome from the Bank of Canada this month. As for the Canadian dollar, the direction of industrial commodities and especially oil will likely remain the key direction determinant. We remain bullish on the loonie in to 2022.

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