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By XE Market Analysis June 11, 2021 7:11 am
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    XE Market Analysis: North America - Jun 11, 2021

    The dollar lifted out of lows after yesterday tracking the sharp drop in longer-dated Treasury yields. The DXY dollar index recouped a large part of yesterday's decline in posting an intraday high at 90.22, having earlier printed a two-day low at 89.96. EUR-USD dropped back to the mid 1.2100s after earlier carving out a two-day high at 1.2196. The ebb in the pairing was the product of a broadly, albeit moderate, decline in the euro concurrent with a broad firming in the dollar, which has lifted out of lows. The forex market looks to be trading off a rise in the dollar's yield advantage, with the 10-year Treasury yield fractionally above flat (after dropping by nearly 10 bp yesterday through to the earlier low) while the 10-year Bund yield is down by over 2.0 bp, as of the early afternoon session in Europe. There hasn't been any data of note out of the Eurozone, while ECB speakers haven't shifted the needle on policy expectations, with Holzmann saying that the rise in input prices has had a smaller impact on inflation expectations than had been anticipated, while Knot said there is some upside risks slipping into the inflation outlook. The ECB's refrain at its policy review yesterday to remove "significantly" higher PEPP purchases in its statement wording, seems to have curtailed EUR-USD's upside potential, while the forex market also appears reluctant to commit to selling dollars despite the sharp drop in longer-dated Treasury yields over the last day, which is perplexing given the sharp spike to a 13-year high in headline CPI. Treasury yields did spike in the initial wake of the CPI release, but the lack of follow-through bond selling seemed to be the final straw for bond bears, who then threw in the towel in the face of an inflation-tolerant Fed, and yields then turned sharply lower.

    [EUR, USD]
    EUR-USD has dropped back to the mid 1.2100s after earlier carving out a two-day high at 1.2196. This is the product of a broadly, albeit moderate, decline in the euro concurrent with a broad firming in the dollar, which has lifted out of lows. The forex market looks to be trading off a rise in the dollar's yield advantage, with the 10-year Treasury yield net flat at prevailing levels (after dropping by nearly 10 bp yesterday through to the earlier low) while the 10-year Bund yield is down by 2.5 bp. There hasn't been any data of note out of the Eurozone, while ECB speakers haven't shifted the needle on policy expectations, with Holzmann saying that the rise in input prices has had a smaller impact on inflation expectations than had been anticipated, while Knot said there is some upside risks slipping into the inflation outlook. The ECB at its policy review yesterday stuck to its commitment of significantly higher PEPP purchases, which disappointed some, including ourselves, who had been anticipating the removal of the word "significantly" from the bank's statement. This seems to have curtailed EUR-USD's upside potential, while the forex market also appears reluctant to commit to selling dollars despite the sharp drop in longer-dated Treasury yields over the last day, which is perplexing given the sharp spike to a 13-year high in headline CPI out of the U.S. Treasury yields did spike in the initial wake of the CPI release, but the lack of follow-through bond selling seemed to be the final straw for bond bears, who then threw in the towel in the face of an inflation-tolerant Fed, and yields then turned sharply lower. We don't expect next week's FOMC will impact prevailing policy expectations, with Fed now widely expected to remain on an inflation-accepting stance on the view that price pressures will abate a y/y base effects and reopening supply bottlenecks shake out. Technically, EUR-USD has lost upside momentum after rallying late March through to the five-month high that was clocked in late May at 1.2267. The 1.2250-70 area can be considered a strong resistance

    [USD, JPY]
    USD-JPY has continued to oscillate around the 109.50 level. The sharp drop in U.S. Treasury yields yesterday weighed on the pair. The failure to sustain gains above 110.00 after foraying above here first time in two months last week, also appears to have weighed on sentiment somewhat. With the prospect of Fed tapering having been put back to "later" from "sooner" following damp May U.S. jobs report, 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 having hit 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]
    Cable nudged out a two-day high at 1.4186, which reflected boarder dollar softness, which has been a consequence of the tip lower in U.S. Treasury yields. The lift has returned the pair back towards recent range highs. The pound yesterday outperformed, rising, for instance, by nearly 0.5% from the nine-day low it saw against the euro while rallying out of the nine-day low it saw versus the yen. The UK currency remains the second strongest performing of the G10+ currencies on the year so far. The Canadian dollar is 1.7% up on sterling over this period. The weakest is the yen. The UK released April and second-revision Q2 GDP data, alongside April industrial production and trade data. Monthly GDP rose 2.3%, slightly beating expectations, though manufacturing, production and construction data spoilt the party. With virus restrictions gradually eased over the last months as vaccination progressed, the data naturally remains uneven, but survey data suggests that growth is broadening and strengthening now. 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 on 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]
    We remain bullish on the Canadian dollar and other cyclical currencies. Oil prices, underpinned by the combo of ongoing sub-capacity output from the OPEC+ group and rising global demand, look set to foray further into 32-month high territory. Industrial commodity prices can also expect to remain underpinned given the level of fiscal and monetary stimulus in the works globally. USD-CAD has ebbed back from recent range highs, back to levels under 1.2100, leaving horizontal resistance at 1.2135 and 1.2150 unchallenged. The pair has been down trending since March 2020, and trend following remains the order of the day.

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