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By XE Market Analysis June 10, 2021 6:09 am
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    XE Market Analysis: North America - Jun 10, 2021

    The currency majors have been idling into key U.S. data and the ECB policy announcement. Global stock markets have also been lacking direction, overall, while most industrial commodities are moderately lower today.The ECB may give the euro a lift, though initial impact potential will be limited ahead of the release of U.S. CPI data for May. The ECB is widely expected to keep the overall policy framework unchanged today, but the monthly purchase volumes under the PEPP program, which were "significantly" enhanced through Q2 as the EU fought with another surge of Covid infections and a slow vaccine rollout, are likely to be downscaled with much of the region's vaccine procurement problems having now been resolved. Other considerations include strengthening domestic and global economic growth, and EU's 750 bln euro stimulus program, which is near to being ratified, alongside spillover effects from the outsized U.S. stimulus. 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 y/y base effects unwind, and markets have so far been happy to buy into this. Given this, unless there is a markedly hotter than expected reading, markets may not react much so long as the Fed tapering debate remains at bay. In this circumstance, and given the markedly higher U.S. inflation rate relative to peers, the dollar is likely to retain an overall softening bias.

    [EUR, USD]
    EUR-USD has settled back under 1.2200 after pegging an eight-day high yesterday at 1.2219.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 comes the ECB's policy review today. 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 argue for increased flexibility on PEPP purchases (ie downscaled 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 today 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 lifted towards the upper part of recent ranges, around the 1.2130-50 area, which can be considered a notably resistance zone. The U.S. dollar has found its feet after coming under broad pressure from last week's U.S. jobs report miss. Oil prices, while softer today, remain up by over 1% from week-ago levels, and are up by over 6% from month-ago levels. Front-month WTI futures yesterday hit a fresh 32-month high at $70.63, though have since corrected back under $70.0. 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. We remain bullish on the loonie in to 2022.

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