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By XE Market Analysis June 16, 2020 6:51 am
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    XE Market Analysis: North America - Jun 16, 2020

    The dollar and yen weakened against most currencies as risk appetite picked back up, catalysed by a Bloomberg News report that the Trump administration is preparing a near $1 tln infrastructure proposal, which followed hot on the heels of the Fed commencing its corporate bond buying program. These developments have been tonic for markets, which have been concerned about a number of coronavirus flare-ups in various places across the globe. Regarding the coronavirus, Beijing reported a drop in the number of new coronavirus cases, to 27 from 36 yesterday, which also fed the rekindling of investor spirits. The BoJ, meanwhile, left monetary policy settings unchanged while sticking to its view that the economy will gradually recover. The injection of optimism saw the MSCI Asia-Pacific stock index rally by over 3% in its largest single-day rise since March 25th. S&P 500 futures have gained by over 1.5%, extending the 0.8% rise the cash version of the index saw on Wall Street yesterday, and European stock markets also rebounded strongly. Amid this, the narrow trade-weighted USD index tipped lower as the U.S. currency saw some of its safe haven premium unwind. The index posted a five-day low at 96.46. EUR-USD edged out a five-day peak, at 1.1353. Sterling has been an outperformer, buoyed both by the rally in global stocks (the currency has established a close correlation with risk appetite during the pandemic era) and by yesterday's joint statement by the UK and EU that trade negotiations will be intensified, which is effectively a signal of intent that both sides are committed to finding compromises on key sticking points, such as fisheries and 'level playing field' rules. Cable printed a five-day high at 1.2687, and the UK currency also made gains versus the euro and other currencies. The commodity currencies posted gains against the dollar and yen, too, although came off their highs. Investors will be keeping a sharp focus on the r-rate of new coronavirus infections as economies continue to reopen.

    [EUR, USD]
    EUR-USD edged out a five-day peak, at 1.1353 amid a rotation lower in the dollar, which has correlated inversely with a rise in risk appetite in global markets. The narrow trade-weighted USD index posted a five-day low at 96.46. EUR-JPY has also gained, posting a six-day high earlier, reflecting a decline in the yen's safe haven premium, similar to the dollar. In data, German ZEW investor confidence lifted to a 63.4 headline reading in June, continuing the rebound from the April nadir of 28.2 and reflecting the reopening of domestic, European and global economies. The data was above the median forecast but still not too surprising for markets, with a similar picture being seen in other reopening economies. The principal driver in forex markets remains the ebb and flow of risk appetite in global asset markets. The prevailing appetite for risk, and thereby a lower dollar, was sparked by both a Bloomberg News report that the Trump administration is preparing a near $1 tln infrastructure proposal, which followed hot on the heels of the Fed detailing its corporate bond purchasing program, which it confirmed started yesterday. These developments have been tonic for markets, which have been concerned about a number of coronavirus flare-ups in various places across the globe. Market participants will be keeping a sharp focus on the r-rate of new coronavirus infections as economies continue to reopen. Ahead today, U.S. retail sales data is expected to show a strong rebound in May from the historic contraction in April. May production data is also likely to show a solid rebound from April, which U.S. and global lockdowns were at their zenith. Fed chair Powell will also be making his semi-annual testimony before the Senate, where he may walk back at least some of the gloominess of last week's post-FOMC outlook.

    [USD, JPY]
    The yen took a downward shift against most currencies as risk appetite picked back up, catalysed by a Bloomberg News report that the Trump administration is preparing a near $1 tln infrastructure proposal, along with the Fed detailing its corporate bond purchasing program, which it confirmed started yesterday. These developments have been tonic for markets, which have been concerned about a number of coronavirus flare-ups in various places across the globe. Regarding the coronavirus, Beijing reported a drop in the number of new coronavirus cases, to 27 from 36 yesterday, which also fed the rebound in investor spirits. The BoJ, meanwhile, left monetary policy settings unchanged, and stuck to its view that the economy will gradually recover. The injection of optimism saw the MSCI Asia-Pacific stock index rally by over 3% in its largest single-day rise since March 25th. Given the richly priced levels of asset markets and risk of a second wave of coronavirus infections, the road ahead from here is likely to be a rocky one. Simply put, we're not likely to see a replay of the strong, two-month-plus rally that equities and other risk assets saw out of the mid-March lows. This may translate into periodic bouts of yen outperformance, driven by safe haven demand.

    [GBP, USD]
    Cable printed a five-day high at 1.2687, and the UK currency also made gains versus the euro and other currencies. The UK currency has been lifted both by the rally in global stocks (the currency having established a close positive correlation with risk appetite during the pandemic era), and by yesterday's joint statement by the UK and EU that trade negotiations will be intensified. The statement is effectively signal of intent that both sides are committed to finding compromises on key sticking points, such as fisheries and 'level playing field' rules, and should see at least some of the Brexit-related discount the pound has been trading with unwind. The BoE's Monetary Policy Committee reviews policy this week (announcing Thursday). As with the Fed and other central banks, the crisis response is in place and policymakers are now in a wait-and-see mode. This will leave the repo rate at 0.25% and QE totals unchanged. The BoE's cheif economist, Haldane, said recently that policymakers were not "remotely close" to deciding on negative rates, although it is being reviewed as an option. In data, the UK monthly employment report showed another spike in the unemployment claimant count, while the official unemployment continues to lag behind the true picture, showing an unchanged 3.9% rate in April. This metric can be expected to spite sharply over the coming months. Inflation figures for May are up tomorrow, which can be expected to show further disinflation, while May retail sales on Friday can be expected to show a sharp bounce from dismal April data.

    [USD, CHF]
    EUR-CHF has fallen back over the last week, though 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 ebbed back to a five-day low at 1.3509, partly on broader softness in the U.S. dollar and partly amid renewed perkiness in the Canadian currency, which has been buoyed by a rally in oil prices. Front-month WTI crude futures lifted to a five-day high at $37.38, which is the culmination of an 8%-plus rally from the low that was seen on Friday. The Fed's commencement of its corporate bond buying program, along with reports that the Trump administration is planning a $1 tln fiscal stimulus program, injected some optimism back into global markets, which in turn led to higher oil prices and higher commodity currencies, including the Canadian dollar. Ahead, and before there is a vaccine or effective treatments of SARS Cov-2, key will be how effectively economies will be in reopening without causing a significant resurgence in coronavirus infections.

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