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By XE Market Analysis March 23, 2021 7:29 am
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    XE Market Analysis: North America - Mar 23, 2021

    The dollar and yen have rallied against other currencies on a safe haven bid as global equity markets drop. Anxieties are running high after both the U.S. and EU sanctioned Chinese officials over human rights abuses in Xinjiang, with China responding with punitive measures against against European officials. The dollar diverged once again with Treasury yields, which have softened. The DXY dollar index rose 0.5% in pegging a four-day high at 92.15, which is just 2 pips 13-day high territory. EUR-USD concurrently dropped back under the 1.1900 level, extending declines from yesterday's high at 1.1947, and Cable declined to a six-week low at 1.3752. AUD-USD fell to a 13-day low at 0.7656. The biggest mover has been the New Zealand dollar, which plunged almost 2% against the greenback in posting a three-month low at 0.7024. News that New Zealand government is introducing taxes aimed at deflating a bubbly housing market sparked selling spree of Kiwi dollars. The move is indirectly intended to allow the the RBNZ to maintain low interest rates after property prices were included as a consideration in the central bank's remit just last month. Elsewhere, USD-CAD rallied over 0.5% to a 12-day high at 1.2595, aided in part by a 4% plunge in of crude prices. The Turkish lira stabilized after yesterday's rout, though Turkish stock markets dove again before circuit breakers suspending trading. The credibility of economic and monetary policy under President Erdogan is once again back in question following the replacement of the central bank head. Contagion to other emerging markets has been limited.

    [EUR, USD]
    We remain bearish on EUR-USD. The ECB this month surprised markets by announcing a ramp up in its asset purchase program in an effort to dampen rising yields. Markets are also focusing on growth and yield differentials, and the U.S. economy is widely seen outpacing the Eurozone and other peers this year, thanks in large part to the massive upcoming fiscal spending spree. Eurozone interest rates are near the most negative in the world (barring Swiss rates), and there is little expectation for the ECB to tighten policy, contrasting to the debate about the Fed, and the possibility it may be forced to tighten sooner than expected.

    [USD, JPY]
    The yen has lifted over the last couple of days amid the narrowing in the U.S. over Japan yield differential (amid a correction in U.S. yields), alongside a backdrop of sputtering global stock markets. The BoJ last week widened the target band under its yield curve control policy and removed explicit targeting on ETF purchases, giving the central bank room to draw in stimulus. We continue to expect that the yen will retain an overall softening bias, with JGB yields to remained relatively rooted to U.S. Treasury and other sovereign yields. The Japanese currency is registering as the weakest of the main currencies on the year so far because of this.

    [GBP, USD]
    The pound has lost upside momentum lately, but continues to register as the strongest of the main currencies on the year so far, which has reflected both a paring in the Brexit discount and confidence stemming from the UK's world leading vaccination program. Over 40% of the population have now received at least one dose of a vaccine, contrasting the picture on continental Europe, where most countries have let to vaccination even 10% of their populations. The BoE at its March policy meeting last week left policy settings unchanged while noting the successful Covid vaccination program and the associated government reopening from restrictions as being consistent with a slightly stronger outlook for consumption growth in the second quarter of 2021. The BoE also noted that the U.S. fiscal stimulus package should provide "significant additional support to the outlook." But the 'Old Lady' also took trouble to emphasize that it will not tighten policy until there is clear evidence that its mandated 2% inflation goal is being met sustainably, suggesting, like the Fed, that it's not in the mode for pre-emptive tightening given the flatness of the Philips curve. This week's UK calendar is highlighted by labour and inflation data, alongside the preliminary PMI surveys for March, which are expected to show a moderate expansion in private sector activity.

    [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]
    USD-CAD rallied over 0.5% to a 12-day high at 1.2595, aided in part by a 4% plunge in of crude prices. Weaker oil prices can cast a negative influence on the Canadian dollar and other oil correlating currencies. We expect oil prices to remain soft, given the demand destruction being caused by the re-implementation of lockdown measures across much of Europe. We have been noting that while oil prices have been ascending for five consecutive months, upside momentum has been weakening. Prices have become quite lofty, having long since been re-established to pre-pandemic level norms, while global demand has continued to lag behind pre-Covid levels. The OPEC+ group have maintained tight quotas through to April, though the discipline is looking increasingly likely to falter, with Russia in particular chomping at the bit to increase supply. U.S. shale production will also continue to ramp higher, despite some hindrances imposed by the Biden administration.

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