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By XE Market Analysis May 4, 2020 7:23 am
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    XE Market Analysis: North America - May 04, 2020

    The dollar has lifted across-the-board on a safe-haven bid against a backdrop of tumbling stock markets in Europe and Asia, and with S&P 500 futures racking up losses of about 1%. Both Japanese and Chinese markets were closed, with both countries an extended public holiday periods. The narrow trade-weighted USD index lifted above its Friday peak in making a high at 99.46, gaining about 0.9% from the lows. EUR-USD has concurrently ebbed below its Friday lows in reaching a 1.0923 nadir, retracing some of the gains seen from the April-24th low at 1.0726. The dollar has similarly gained versus the pound and other currencies, including the commodity currencies, which have been correcting gains seen last week. AUD-USD posted a 10-day low at 0.6373, and USD-CAD printed an 11-day high a 1.4152. Front-moth WTI crude prices fell by over 7% making a low at $18.05 low, having breached its Friday low on route. The out-of-kilter demand/supply balance is keeping a lid on oil prices, although approaching capacity limits in global storage facilities are expected to force oil producers into significant supply cuts. Risk aversion has been stocked by a combo of weak economic data and, more particularly, the Trump administration's ratcheting up of its accusations about China and the coronavirus pandemic. U.S. Secretary of State Pompeo said on Sunday that there was a "significant amount of evidence" that the virus emerged from a lab in Wuhan. Beijing, via an editorial in the state-controlled Global Times responded by saying that the U.S. was "bluffing." Reports last week suggested that the White House is considering taking a number of measures against China, including new tariffs. It should be obvious that Trump motives for blaming China are high six-months out from a presidential election, though the fraying relations between the two biggest economies is nevertheless a concern for investors. A series of April PMI survey data, meanwhile, have been painting a picture of continuing contraction. The manufacturing PMI outcomes of South Korea, Taiwan and Japan, all hit their worse levels since the financial-crisis era of 2009, while the final April Eurozone manufacturing PMI was revised to a record low.

    [EUR, USD]
    EUR-USD has ebbed below its Friday lows in reaching a 1.0923 nadir, retracing some of the gains seen from the April-24th low at 1.0726. Recent gains had been fuelled by a rotation lower in the dollar, which had been concomitant with a risk-on vibe in global markets, underpinned by the sift to reopening from lockdowns in many economies. Increasing tensions between the U.S. and China, with the former blaming the coronavirus pandemic on the latter, and threatening to take measures, including fresh tariffs, have fostered a new phase of risk aversion in global markets, which in turn is now underpinning the dollar against most other currencies, including the euro. EUR-USD remains to the south of 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. We expect the pair to lack sustained directional bias for now. Both the ECB and the Fed are pursuing aggressive easing policies, both Europe and the U.S. are facing significant economic headwinds from virus-containing lockdown measures, and both Europe and the U.S. are now pursing economic reopeing strategies.

    [USD, JPY]
    USD-JPY has remained heavy, but above Friday's 106.60 low and, in turn, the seven-week low seen last Wednesday at 106.36. The yen, meanwhile, has been trading firmer against the euro, commodity currencies, and most other currencies today, against a risk-off backdrop. Trading conditions have been thin with both Japan and China amid a week-long holiday period. We expect the Japanese currency to remain in the outperforming list with risk aversion taking a grip again amid a combo of weak economic data and, more particularly, the Trump administration's ratcheting up of its accusations about China and the coronavirus pandemic. U.S. Secretary of State Pompeo said on Sunday that there was a "significant amount of evidence" that the virus emerged from a lab in Wuhan. Beijing, via an editorial in the state-controlled Global Times responded by saying that the U.S. was "bluffing." Reports last week suggested that the White House is considering taking a number of measures against China, including new tariffs. It should be obvious that Trump motives for blaming China are high six-months out from a presidential election, though the fraying relations between the two biggest economies is a real concern for investors.

    [GBP, USD]
    Sterling has come under some pressure over the last couple of sessions. The UK currency has been correlating with global equity market direction, similar to a commodity currency, over the last couple of months. The BoE's May Monetary Policy Committee meeting is up this week (announcing Thursday), which will be accompanied by its quarterly Inflation Report. The central bank has already slashed its policy repo interest rate to near zero while expanding its QE programme and putting in liquidity measures in response to the financial market consequences of the pandemic-forced economic lockdown. As with the Fed and ECB last week, this policy meeting isn't likely to be too eventful, with the policy framework expected to be left unchanged for now. Large reductions in the central bank's growth and inflation forecasts can taken as a given in the Inflation Report. Data this week is highlighted by the by the release of the final April versions of the services and composite PMI readings (Tuesday), along with the April construction PMI report (Wednesday). The UK's final April manufacturing PMI was released on Friday, and was revised lower to 32.6 from 32.9, tumbling from 47.8 in March. The UK's lockdown is set to last through to Thursday, when the government will make a second review. It's uncertain as yet if a phased reopening of the economy will be announced, though the five criteria the government has listed as necessary to be met (flattening in the infection rate, ability of the health system to cope, increased diagnostic testing capacity etc) look to be nearly achieved.

    [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. 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 printed an 11-day high a 1.4152. Front-moth WTI crude prices have concurrently fallen by over 7% making a low at $18.10 low, having breached its Friday low on route. The out-of-kilter demand/supply balance is keeping a lid on oil prices, although approaching capacity limits in global storage facilities are expected to force oil producers into significant supply cuts. Oil prices remain down by over 70% from the highs seen in early January, marking a significant deterioration in Canada's terms of trade. The near 9% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the near 6% decline against the euro and near 10% drop versus the yen, reflects the pricing-in of this reality in currency markets. Going forward, focus is on economies that are reopening from virus-containing lockdowns, and how successful, extensive and durable this proves to be. This should rekindle demand for oil and other commodities, which should in turn put in an underpinning for the Canada's currency.

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