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By XE Market Analysis June 11, 2020 7:15 am
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    XE Market Analysis: North America - Jun 11, 2020

    The dollar and yen rallied on a safe haven bid after a downbeat Fed provided the spark to catalyze a correction in asset markets. The narrow trade-weighted USD index posting a two-day high at 96.49, recouping from yesterday's three-month low at 95.98. The biggest loser out of the main currencies has been the risk-sensitive Australian dollar, which led underperformance in the commodity currency group. Both AUD-USD and AUD-JPY fell by around 1%, with the former printing a two-day low at 0.6906 and the latter pegging a nine-day low at 73.88. USD-CAD rallied by just over 0.5% in making a two-day peak at 1.3489. Oil and most other industrial commodity prices tumbled. Front-month WTI crude prices were showing a near 4% decline, as of the late London morning session, at $38.10. Stock markets in both Europe and Asia-Pacific have been a sea of red, while S&P 500 futures racked up a loss of over 1.5%. Central banks, having already set crisis-era levels of policy accommodation, now look to be on hold for the most part, while many assets, having rallied to pre-pandemic levels, are looking expensive amid an emerging consensus that the world economy make need several years to fully recovery from the economic damage that the coronavirus, lockdowns, social distancing and consumer behavioural changes have caused. There is also the risk of a delayed negative impact on major economies as government-buttressing schemes unwind later in the year, 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).

    [EUR, USD]
    EUR-USD has rebounded after earlier printing a low at 1.1326, printing a rebound high at 1.1401, which is near yesterday's three-month peak at 1.1423. The high yesterday which the culmination of a two-week-plus rally from sub-1.1000 levels. Once again, a broader directional shift in the dollar has been the dominant driver of EUR-USD. The U.S. currency has pared earlier gains, despite European equities and U.S. index futures showing quite sharp declines. A 10bp-plus narrowing in the 10-year U.S. T-note yield over the Bund benchmark yield over the last couple of days has given some strength to the bullish EUR-USD viewpoint, although safe haven demand for dollars could still upend this should the stock market correction persist. 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 currency 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 lockdown in the event there are 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). Also, there is a risk that bankruptcies will soar once government business and pay support schemes fall away in the coming months, along with risks associated from U.S.-China tensions.

    [USD, JPY]
    USD-JPY dropped to a four-week low at 106.80, reflecting outperformance in the Japanese currency amid a backdrop of tumbling stock markets. Central banks, having already set crisis-era levels of policy accommodation, look to be on hold now, while many assets, having rallied to pre-pandemic levels, are looking expensive given that it is looking likely that the world economy make need years to recovery from the economic damage that the coronavirus and associated lockdowns, social distancing and consumer behaviour changes have caused. There is also 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 don't look to 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]
    Sterling has lost ground to the outperforming dollar and yen, and some of its main peers, including the euro amid the risk-off backdrop, although has still gained against the underperforming Australian and New Zealand dollars. The UK currency's pandemic-era proclivity to correlate with global stock market direction is once again in evidence. From the UK-EU trade negotiation front, the EU's chief negotiator, Bernier, yesterday reiterated the EU's stance, that its post-Brexit relationship with the UK cannot be the same as in the cases of the EU and Canada, or the EU and Japan, given the UK's proximity and the consequent necessity to come up with an acceptable deal on fisheries and a level playing field (common rules and standards). This implies that there has been little traction in negotiations, with London demanding much more generous access to fisheries than under EU proposals (which closely mimic the prevailing status quo) and not to be tied to EU regulations (which, so UK government argues, would impede the UK's freedom to strike trade deals with other major economies and trading blocs). Unless there is a breakthrough in trade talks, the pound's upside potential is likely to remain limited. The UK data calendar this week is quiet until Friday, when April GDP and second-estimate Q3 GDP data is published, alongside April production and trade figures.

    [USD, CHF]
    EUR-CHF has continued to trade comfortably above the series of lows near 1.0500 that were seen from March through to mid May. Committed SNB intervention prevented the 1.0500 level from being breached over this period, when the consequences of the pandemic increasing bets about a possible breakup of the euro area, and even the EU. However, since the Franco-German backed EU recovery fund gained traction in mid May, these bets have gone sour, which led to a rebound in EUR-CHF. The recovery fund is up for ratification at the June 18th-19th EU summit. Assuming this passes, as looks likely (though its form still remains unclear), this should keep EUR-CHF supported for a while. Further out, the Swiss economy will likely be better able to recover from the pandemic era than the eurozone economy. Along with Swtizerland's massive current account surplus, these are factors that suggest upside potential for EUR-CHF will be limited, regardless of the SNB's desire for weaker franc.

    [USD, CAD]
    USD-CAD rallied by just over 0.5% in making a two-day peak at 1.3489. Oil and most other industrial commodity prices tumbled, which is putting pressure on oil-correlating currencies. Front-month WTI crude prices were showing a near 4% decline, as of early London trading, at $38.08.

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