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By XE Market Analysis June 26, 2020 7:05 am
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    XE Market Analysis: North America - Jun 26, 2020

    Narrow ranges with a modicum of yen firmness have been prevailing against a backdrop of higher equity markets in Europe and Asia, which have tracked Wall Street gains, though U.S. equity index futures have shown little directional impulse. China markets were closed for a second day, and will reopen on Monday. Concerns about a new wave of coronavirus cases as economies reopen (the U.S. yesterday reported a fresh high in daily confirmed new cases, and Australia today reported a new two-month high in new cases, for instance) continue to vie with massive stimulus and improving economic data. In currencies, EUR-USD plied a narrow range in the mid-to-low 1.1200s so far today, holding above yesterday's four-day low at 1.1190. USD-JPY dipped to a two-day low at 106.86, while EUR-JPY edged out a four-day low. AUD-JPY also dipped, though remained above its Thursday nadir. Cable, after tumbling from the mid 1.2500s over the last couple of days, which culminated in a four-day low at 1.2388 yesterday, steadied in the lower 1.2400s. AUD-USD managed to surpass yesterday's high by 2 pips in making a peak at 0.6896 before retreating. USD-CAD has settled to a consolidation of recent gains, holding in the low-to-mid 1.3600s, below yesterday's 11-day high at 1.3671. Front-month WTI oil futures have edged out a two-day high at $39.34. The WTI benchmark remains down by just over 2% from week-ago levels. In data, Japanese inflation indications reaffirmed, to little surprise, a picture of benign price pressures, well below the BoJ's target. BoJ Governor Kuroda warned of a slow recovery ahead, affirming the market view that the central bank is set to chop growth projections at its policy review on July 14th-15th. ECB chief Lagarde warned of a "restrained" recovery in the Eurozone.

    [EUR, USD]
    EUR-USD has been holding in the low-to-mid 1.1200s, above yesterday's four-day low at 1.1190 and yesterday's peak at 1.1261. This price action represents a consolidation of recent losses, with the pair having dropped from a 10-day high that was seen on Tuesday at 1.1350. The correction was fuelled largely by a broader bid for dollars as global markets misfired on concerns about a new wave of coronavirus cases as economies reopen (the U.S. yesterday reported a fresh high in daily confirmed new cases), which offset massive stimulus and improving economic data. Presently, European stock markets are higher, following the lead from Asian markets and the late rally seen on Wall Street yesterday, while U.S. equity index futures are modestly in the red. Markets are trapped in a constant state of tweaking risk premia, which for EUR-USD means downside pressure when the dollar gains on safe haven demand, and upside pressure when things are looking more rosy. The EU's proposed EUR 750 bln multiannual financial framework fund has continued to be taken as a positive step in analysts commentaries -- being a hinge factor of bullish euro calls at Morgan Stanley and Citi, for instance. Morgan Stanley analysts argued that the EU proposal means that some of the risk premium for EU break-up risk will abate, and that the creation of a new large and liquid, higher-yielding AAA asset will attract inflows from real money investors and reserve managers. The team at MS is forecasting EUR-USD at 1.2000 by Q2 next year. We take a slightly more circumspect view given the risks of setbacks on the road back to economic normalcy, which likely won't be achieved until such time there is a vaccine or effective treatment for the SARS Cov-2 coronavirus, which in turn should keep the dollar prone to bouts of outperformance.

    [USD, JPY]
    The yen has taken a turn lower amid a backdrop of rising stock markets in Asia and in Europe, which have followed the late rally that was seen on Wall Street yesterday. Shifting risk premia has continued to influence the Japanese currency's safe haven premium, which is likely to remain a primary driver of direction for the currency. While the BoJ remains committed to uber stimulus, the central bank is no longer unique in this regard, and so has been having little weakening impact on the Japanese currency relative to peers. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the yen has built up a reputation as a safe haven. Market participants are grappling with glass-half-empty and glass-half-full arguments. There are signs of new waves of coronavirus infections as economies reopen, which has already seen social restrictions being re-introduced in some places (such as Beijing and in California), although the overall trend remains to de-restriction. Geopolitical issues remain wildcards, although, on the U.S.-China front, its pretty clear that President Trump values his trade deal with Beijing while at the same time wanting to appear tough on China, five months out from the presidential election. On the glass "half full" side, there is the expectation that the massive stimulus by global central banks is primed to give risk assets a major boost, which in the event would likely see the Japanese currency underperform.

    [GBP, USD]
    The pound has settled in the lower 1.2400s against the dollar, after tumbling from the mid 1.2500s over the last couple of days, which culminated in a four-day low at 1.2388 yesterday. EUR-GBP, meanwhile, has continued to consolidate below the three-month peak that was printed earlier in the week at 0.9082. A combo of the upcoming EU recovery fund and the market perception that the BoE is unwinding monetary stimulus prematurely, has been underpinning EUR-GBP. We continue to expect the pound to remain apt to underperformance in the weeks ahead, assuming there won't either be a significant breakthrough in UK-EU trade talks, nor a walk back in the BoE's apparent tapering in QE.

    [USD, CHF]
    EUR-CHF has fallen back over the last couple of weeks, 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 current EU summit, which concludes tomorrow. 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. Regarding the SNB, the central bank left policy settings unchanged at its quarterly review last week, reaffirming that aggressive intervention will remain the main tool to fight the impact of the coronavirus pandemic on the franc. SNB chief Jordan stressed that the currency remains "highly valued" and repeated that the central bank will continue to sell it as needed. The SNB is now forecasting a contraction in economic activity of 6% this year, the most severe recession since the 1970. The SNB also trimmed inflation forecasts, though it is pretty clear that policymakers are reluctant to go below the current level of -0.75% for the key policy rate. Negative for longer remained Swiss policymakers' central policy guidance.

    [USD, CAD]
    USD-CAD has settled to a consolidation of recent gains, holding in the low-to-mid 1.3600s, below yesterday's 11-day high at 1.3671. Front-month WTI oil futures have edged out a two-day high at $39.31. The WTI benchmark remains down by just over 2% from week-ago levels, having in the interim pegged a 16-week high at $41.63. Oil prices are likely to remain the principal driver of Canadian dollar direction. Bullish momentum in crude markets has been waning, despite the recent fresh highs. Markets have gone some way in pricing-in reopening global economies, and the associated demand stimulus things is bringing, although prices remain some way below pre-crisis levels (WTI benchmark prices averaged about $60 in the year to early March). Supply still remains tight, with the OPEC+ group maintaining reduced output quotas and with relatively cost intensive U.S. production continuing to slide. For USD-CAD, we anticipate that the balance of risks remains to the downside, though this assumes that global economies are able to keep a lid on new coronavirus inflections until such time there is a vaccine or effective treatment of the SARS Cov-2 virus. This view is being somewhat stretched at present, with the U.S, for instance, reporting a sharp rise in the rate of new coronavirus cases. Our view also assumes that the OPEC+ group will maintain discipline over supply quotas.

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