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By XE Market Analysis May 4, 2021 7:22 am
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    XE Market Analysis: North America - May 04, 2021

    The dollar has lifted out of lows seen yesterday, which were a product of a drop in long-dated U.S. yields following sub-forecast April ISM and March construction data. The narrow trade-weighted DXY USD index lifted back to near 92.20 after posting a low at 90.87. This returns focus back on yesterday's two-week peak at 91.39. We retain a bullish medium-to-longer term view of the dollar. The prognosis for the U.S. economy remains unchanged despite yesterday's data disappointments, and upside risk should be factored on Friday's release of April nonfarm payrolls report given the big declines in initial claims through the month, and big increases in both consumer confidence and producer sentiment. Markets should also be factoring in the possibility of a peer-bearing doubt digit quarterly GDP growth in Q2. It should be apparent that not all market participants are, or will remain, as sanguine on the inflation outlook as the Fed has been. Advocates of this view see that the central bank's adoption of a 'lower for longer', outcome based monetary policy rubric, which replaced the more conventional pre-emptive, forecast-based, approach, was a mistake given the massive, consumer-focused fiscal stimulus, which alongside the success in the Covid vaccination program and 'release' of built-up household savings, is putting the U.S. economy on a trajectory towards full capacity. From this perspective, the risk of deflation is now much less than the risk of inflation, and an inflation that could move well beyond what could be accounted for the temporary impact of base effects.

    [EUR, USD]
    EUR-USD has tested the waters under 1.2000 for the first time in a couple of week. The pair continues to be largely driven by broader directional shifts in the dollar. With the U.S. economy building up a head of steam on the back of the Covid vaccine rollout, alongside the release of pent-up consumer demand and the outsized, record-level of fiscal stimulus, and with a central bank that remains steadfastly in uber-accommodative mode, the risks for inflation, and the dollar, are to the upside. We have been noting that the upward trajectory for U.S. price increases into 2021 extends beyond the much-touted base effects that are clearly lifting the y/y measures. In April data (released mid May) we expect CPI gains of 0.2% for both the headline and core. The y/y CPI gain should surge to 3.6% from 2.6%, while the y/y core price gain should climb to 2.2% from 1.6%. We expect y/y CPI gains to extend in May of around 3.8% for the headline and around 2.5% for the core. In sum, a rising bias in longer-dated U.S. yields is likely to re-establish as markets return to pricing in contingency risk that the Fed may be forced to tighten sooner than the 2024 start point for tightening that it has been signalling. As for the euro, peak pessimism about the Covid situation looks to have passed, and Eurozone growth and inflation are set to rise, but lag the U.S. The ECB left policy settings unchanged in April while signalling an unambiguously dovish bias and kicking the decision on whether to extend the PEPP (Pandemic Emergency Purchase Program) down the road.

    [USD, JPY]
    USD-JPY has remained underpinned although below yesterday's three-week high at 109.71.The pair rose last week concomitantly with a rotation high in longer-dated U.S. Treasury yields. Note that Japanese markets have been closed so far this week, and will remain so through to Wednesday, as will Chinese markets.

    [GBP, USD]
    The pound was given buoyancy by a stellar UK PMI report, which was revised higher in the final April reading for manufacturing, to 60.9 -- the best since the record 61.0 reading that was seen in July 1994. The data also showed a sharp increase in prices changed to clients as manufacturers passed rising costs on to clients, which combined with rising employment won't go unnoticed by the BoE. Markets have already been anticipating upgraded growth and inflation forecasts in the Old Lady's upcoming release of its quarterly Monetary Policy Review (released Thursday). The 2-year gilt yield rose back towards recent highs near 0.085% in the wake of the data, and the 10-year gilt yield is zoning in on recent highs. The pound is registering as the second strongest of the currencies we keep tabs on (being the G10 units plus some others, such as the Australian and New Zealand dollars), with the dollar the strongest. Cable pared earlier declines in from its low at 1.3851 to levels around 1.3890. Yesterday's closing level is at 1.3909-10. The UK has in the meanwhile pegged respective 2- and 12-day highs versus the yen and euro, and a 13-day high against the Aussie dollar. We retain a bullish view on the pound against the euro, and more especially the low-yielding currencies of surplus economies, such as Japan and Switzerland, which is hinged on the expectation that the global pandemic recovery trade will continue into 2022. The UK's main equity indices are replete with globally-focused cyclical stocks, which should benefit as major economies rebound. The broad trade-weighted value of the pound still remains near historically weak levels, too. Local elections loom on Thursday, where a particular focus will be on whether pro-independence Scottish parties can reach the supermajority threshold. Polling suggests it's too tight to call.

    [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 has consolidated recent declines which produced a three-year low at 1.2264, in what is the pair's 10th month of decline out of the last 13 months. The Canadian dollar is strong correlate of oil prices, which although settling off the six-week highs that were seen last week, still remain up by some 6% from recent lows -- and by around 200% from year-ago levels.

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