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By XE Market Analysis June 10, 2020 7:43 am
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    XE Market Analysis: North America - Jun 10, 2020

    The dollar pared intraday losses as European stock markets declined and U.S. equity index futures tipped lower, reversing overnight gains. A combo of lofty valuations and the proximity of the Fed policy announcement later today, which if nothing else is likely to reaffirm that further central bank stimulus is unlikely (unless the recovery from April's economic nadir falters), elicited a position-trimming mood in markets. The narrow trade-weighted USD index rebounded to levels around 96.25-26 after earlier printing a fresh three-month low at 96.06. EUR-USD capped out after edging out a five-day high at 1.1376, leaving the three-month peak seen last Friday at 1.1385 unchallenged. ECB's Mueller said that another expansion in asset purchases was unlikely, on the proviso that the economy recovers in line with the central bank's forecasts. Elsewhere, USD-JPY has posted a 12-day low at 107.28 in what is now the pair's third consecutive down day. Cable dropped back to the lower 1.2700s after posting a new three-month high in pre-London trading, at 1.2787. AUD-USD reversed a good portion of declines seen yesterday in logging an intraday high at 0.7009. The pair remained shy of the 11-month peak seen early Tuesday, at 0.7041. USD-CAD unwound most of yesterday's gain in posting an intraday low at 1.3368. Front-month WTI oil prices were showing a 3%, as of early London afternoon session, though remained above yesterday's five-day low at $37.07.

    [EUR, USD]
    EUR-USD edged out a five-day high, at 1.1376, so far remaining shy of the three-month peak seen last Friday at 1.1385. Markets are presenting lacking commitment. Asset market valuations look high given that it might be two years before world GDP recovers to pre-pandemic levels, while the scope for further central bank stimulus looks to be limited at this juncture. ECB's Mueller said as much earlier, on the proviso that the economy recovers in line with central bank forecasts. The Fed's announcement and press conference is the main event today, though with its crisis response in place, and no changes widely anticipated and it is unlikely to be a major marketing-moving experience. The Fed will be leaving its 0%-0.25% rate band intact while reiterating its lower-for-longer posture. And after Friday's blowout jobs report, we suspect Fed Chair Powell will want to convey a cautiously optimistic tone. Amid myriad topics for discussion, neither negative rates nor removing accommodation will be on the agenda, as has been clearly signalled already by policymakers. The Fed's quarterly forecasts will be included again after they were skipped in March. The bigger-picture 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. 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]
    USD-JPY has posted a 12-day low at 107.28 in what is now the pair's third consecutive down day. Expectations for the Fed to reiterate its "lower-for-longer" policy guidance at the conclusion of its FOMC meeting today has helped keep the dollar on a back foot. With many asset prices trading at levels last seen 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. Then there is the risk of a delayed negative impact on major economies as government-buttressing schemes unwind, and the risk of there being a second wave of coronavirus infections (the r rate is already creeping back above 1, indicating an exponential spread, in several states in the U.S. and other areas in Europe and elsewhere). Overall, markets may not be out of the woods yet, and there could be prone to further risk-off phases, which in turn would support the yen.

    [GBP, USD]
    Cable has posted a new three-month high, at 1.2787, aided by a generally softer dollar. EUR-GBP, in contrast, has remained within recent ranges. The pound's pandemic-era proclivity to correlate with global stock market direction has remained in evidence of late. 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]
    USD-CAD unwound most of yesterday's gain in posting an intraday low at 1.3368. Front-month WTI oil prices were showing a loss 3%, as of the late London morning, at $37.77, though remaining above yesterday's five-day low at $37.07. With oil prices looking to have entered a consolidative phase (after WTI benchmark prices hit a three-month high at $40.44), the Canadian dollar and other oil-correlating currencies are likely to follow suit. The decision by the OPEC+ group to extend prevailing output quota limits for another month has been factored in.

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