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By XE Market Analysis May 1, 2020 7:19 am
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    XE Market Analysis: North America - May 01, 2020

    The yen has outperformed while commodity currencies have underperformed amid a sharp phase of risk-off positioning. The dollar traded mixed, losing ground to the yen and euro, among other currencies, while gaining on the Australian and Canadian dollars, among others. U.S. President Trump soured the mood in equity markets, raising his accusations against China about the coronavirus outbreak, threatening new tariffs. Sources cited by Reuters said that a range of options against China were being discussed, but considerations were at an early stage. The S&P 500 closed on Wall Street yesterday with a 0.9% decline, which capped out the best month the index has seen since 1987 as shares rebounded from the deep declines that were seen in March. Trading in S&P 500 futures have seen losses accelerate, racking up declines of over 2% in the overnight session. Trading conditions have been thinned by the absence of many European and other countries, including China, for May Day holidays. Final PMI survey data out of the UK, Japan and Australia reaffirmed the dismal economic picture due to the lockdowns. The biggest mover out of the main currencies has been the Australian dollar, which dropped by over 1% in posting a three-day low at 0.6438 against the U.S. dollar. AUD-JPY dove by nearly 1.5%. The Kiwi dollar also came under pressure, while USD-CAD lifted by over 0.7% in printing a three-day high at 1.4044. Elsewhere, EUR-USD tested mid-Aprils highs at 1.0990-91. USD-JPY declined by nearly 0.5% in printing a low at 106.74, which retraces over two thirds of the gain seen yesterday.

    [EUR, USD]
    EUR-USD has tested the mid-April highs at 1.0990-91, which, if breached, would put the paring in one-month high territory. Today marks the third consecutive higher high for EUR-USD, driven once again by a broad softening in the dollar, although the euro has seen concurrent strength against some other currencies, including the pound and the underperforming commodity currencies. The action is coming in a thin London interbank market, with participation depleted by the absence of many European countries for May Day holidays. The the dollar is also weakening despite quite sharp declines in equity markets, breaking with the recent correlation. EUR-USD is now back to near the tep back toward the halfway mark of the volatile range that was seen during the height of global market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. The ECB yesterday left the overall policy framework unchanged at the conclusion of its monthly policy meeting, but announced further liquidity-boosting measures. The move was a little more than markets had anticipated, which consequently weighed on the euro, though the common currency quickly bounced back against the dollar and other currencies. Obviously the same lockdown-related economic headwinds are bearing down on the U.S. and other countries, limiting the divergence in central bank policy and scope for directional currency gyrations.

    [USD, JPY]
    The yen has traded firmer against the dollar and other most currencies, especially versus underperforming commodity currencies today, which have come under pressure after U.S. President Trump soured the mood in global equity markets by escalating his accusations against China about the coronavirus outbreak, including threatening new tariffs. This has stimulated safe haven demand for the Japanese currency. USD-JPY declined by nearly 0.5% in printing a low at 106.74, which retraces over two thirds of the gain seen yesterday. Japan's final April manufacturing PMI confirmed a fall to 41.9 from 44.8 in the month prior, which is the lowest level seen since April 2009. The BoJ released the minutes from its policy meeting, held on Monday, which didn't offer too much insight, noting, for instance, that the damage from the pandemic could be "enormous." The BoJ this week delivered on expectations in announcing that JGB purchases can now be unlimited (formerly capped at Y80 tln per year) while also announcing an increase in corporate bond and commercial paper. The yen wasn't impacted, with the move largely symbolic as the central bank's 0% target on the 10-year JGB was being met without the need for unlimited purchases.

    [GBP, USD]
    Cable lifted to a 1.2486 high on the back of dollar softness. Sterling remains up by an averaged 1% versus the dollar, euro and yen from week-ago levels, reflecting its correlation with global stock market performance. The UK currency has been apt to perform similar to other "risk-off" currencies, such as commodity currencies, during the pandemic crisis, with the combo of the UK's open economy, current account deficit and outsized financial sector, making the currency sensitive to swings in risk appetite in global markets. With the global rate of coronavirus inflection in decline, and major economies starting a phased reopening (and while the UK remains in lockdown, the UK Treasury is reportedly drawing up measures to "get Britain back to work," including plans for "Covid-secure offices), the tide looks to be shifting, though this assumes that the reopening can be done without causing a second wave of infections. This backdrop should help support the pound, though the continued risk for the UK leaving the post-Brexit transition membership of the EU's single market at the end of the year should curtail upside potential.

    [USD, CHF]
    The SNB has successfully been putting a cap on the franc, which has seen EUR-CHF in recent weeks skirt along just above the five-year low that was first seen on March 9th at 1.0505 without breaching it. Weekly sight deposit data out of Switzerland has pointed to the extent of SNB franc selling over the pandemic crisis period, which was most acute in March before basing out as global governments and central banks acted with interventions and stimulus packages. A rise in sight deposits (money held by commercial banks) can suggest the francs turning up after being sold by the central bank. Total sight deposits rose by CHF 28.6 bln over the last four weeks, at a diminishing rate (rising by just 3 bln in the last week, through to April 16th) as the demand for the Swiss currency as a safe haven tapered off. The 1.0500 level in EUR-CHF, while not a fixed floor, has clearly been a line in the sand of the SNB. The Swiss central bank has a long history of intervening to either limit of slow the pace of appreciation in its currency, which normally comes during periods of risk aversion in global markets and/or euro underperformance. From 2011 through to 2015, the SNB capped the franc via a 1.2000 floor in EUR-CHF. When the cap was abandoned in January 2015, the franc rallied by 30%, having become unfeasible for the SNB to counter the ECB's expansive monetary policies. A similar circumstance is afoot today, with the ECB maintaining expansive polices following a period of safe haven demand for the franc. In January, the U.S. added Switzerland to its list of currency manipulators. The move seemed a bit harsh given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argued that Switzerland should pursue a more expansive fiscal policy as a remedy.

    [USD, CAD]
    USD-CAD lifted by over 0.7% in printing a three-day high at 1.4043. The Canadian dollar has followed other commodity currencies lower today, after U.S. President Trump soured the mood on global equity markets by ratcheting up his accusations against China about the coronavirus pandemic. June WTI crude future came under pressure, though not before posting a two-week high at $20.45. Crude prices subsequently ebbed back back under $20. While oil prices have doubled in less than a week, prices remain down by about 70% from the highs seen in early January, marking a significant deterioration in Canada's terms of trade.

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