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By XE Market Analysis June 30, 2020 11:40 am
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    XE Market Analysis: North America - Jun 30, 2020

    The dollar has traded modestly firmer, although ranges have been fairly narrow so far today. European stock markets sputtered, as S&P 500 futures, while Asian stock markets gained moderately. Pandemic-related nervousness about the global economic outlook continues to vie with incoming May and June data that are mostly showing a strong rebound from the April lockdown nadir. The narrow trade-weighted USD index printed a four-week high at 97.78, while EUR-USD sank to a four-day low at 1.1189. Cable also ebbed back though remained above the one-month low that was seen yesterday at 1.2251. USD-JPY traded in a sub-30-pip range, holding below the three-week high that was seen yesterday at 107.89. AUD-USD saw a modest drift lower, breaching yesterday's low in reaching 0.6833. USD-CAD edged modestly higher, but remained below yesterday's peak at 1.3706. UK data, released ahead of the London open, showed an unexpected downward revision in final Q1 GDP data, to -2.2% q/q from -2.0% q/q reported initially. This comes with the pound having yesterday hit respective one- and three-month lows against the dollar and euro, largely on concerns about the risk of the UK leaving it transitory membership of the EU's single market at year end and shifting to trading on less-favourable WTO terms. There have also been concerns that the BoE is prematurely tapering its QE program, which BoE Chief Economist Haldane, who spoke earlier, did little to dispel -- conceding that economic risks remain "considerable" but arguing that the positive news on demand has more than counterbalanced the rise in downside risks to the economy. In other news, reports suggest that Germany's parliament is set to approve the ECB's QE program.

    [EUR, USD]
    EUR-USD has ebbed to a four-day low at 1.1199 as the narrow trade-weighted USD index printed a four-week high at 97.78. The calendar this week is busy across the globe with May and June economic data, which are likely to further evidence the strong rebound from the April lockdown trough. The data may be somewhat overlooked by markets with primary focus falling on the infection rate of the coronavirus, amid worries of double-dip recession, or at least a post-rebound growth slump. 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 recent 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, liquid and 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. Note that U.S. markets will close on Friday for the Independence Day holiday.

    [USD, JPY]
    The yen has been trading with a neutral-to-softer bias, despite the risk-off backdrop in regional equity markets, which were largely viewed as a catch-up trade to the drop in North American markets on Friday. Weekend news showed a continuing vault higher in new coronavirus cases in the U.S., which is forcing some states to reconsider their reopening plans. New Zealand prime minister, Ardern, also said that it is "untenable" to open up borders at this time. More positively, a candidate vaccine being developed China received special military drug approval after passing clinical trials. USD-JPY edged out an intraday low at 107.38, with the pair remaining well within its Friday range. EUR-JPY lifted to a six-day high. AUD-JPY gained modestly, but remained within its Friday low and high. 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.

    [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 edged modestly higher, but remained below yesterday's peak at 1.3706. Front-month WTI crude futures printed a six-day high at $39.71, and have since traded modestly softer with oil prices settling in a consolidation of recent gains, which left a three-month peak at $41.63 on June 23rd. The flattening out in oil prices has taken the wind out of the sails of the Canadian dollar and other oil-correlating currencies. USD-CAD last week peaked at a one-month high at 1.3716. While May-June economic data are mostly beating expectations as global economies rebound from the April lockdown nadir, concerns are running high that a new wave in coronavirus infections will crimp growth potential in the months ahead. For USD-CAD, we are bullish at this juncture. The June-1st high at 1.3802 provides and upside waypoint.

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