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By XE Market Analysis May 6, 2020 7:25 am
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    XE Market Analysis: North America - May 06, 2020

    The yen has been outperforming so far today, with the dollar following behind. The biggest losers out of the main currencies were the euro and the pound. Stock markets in Europe flagged, while S&P 500 futures rose nearly 1%, and oil prices hit fresh rebound highs. Investors continued to digest the German constitutional court ruling that some of the measures the Bundesbank is taking under the ECB's Public Sector Purchase Program are not covered by EU law, though the ECB brushed this off (and, crucially, the German court refrained from ruling that the ECB's asset purchase program violate its mandate). EUR-USD nevertheless fell nearly 0.5% in printing a 12-day low at 1.0787. USD-JPY edged out a fresh seven-week low, at 106.21, while EUR-JPY posted a three-and-a-half year low at 114.62 reflecting both yen safe-haven driven outperformance and euro underperformance. Tokyo markets remained closed for Japan's Golden Week holidays, and will reopen tomorrow. Chinese markets reopened after the long May Day holidays. USD-CAD ebbed to the lower 1.40s, though has so far remained above yesterday's five-day low at 1.4006. June WTI crude futures posted a fresh three-week high at $25.57, marking a gain of over 250% from the low seen on April 28th, though prices still remain down by over 70% from the highs seen in January. Cable fell below recent lows in making a nine-day low at 1.2359, nearing the April-21 low at 1.2347. Final April Eurozone services and composite PMI data, and April UK construction PMI data painted a grim picture, although nota surprise in the lockdown era, with markets largely desensitized to bad economic data and looking ahead to economic reopenings. The SNB's intervening actions have not been going unnoticed. An FT article cited analyst concerns about the ballooning SNB balance sheet, which is a consequence of its intervention to cap franc strength by buying foreign currencies, and which risks the credibility of the central bank.

    [EUR, USD]
    The euro has continued to trade lower against the dollar and yen, which today has come amid backdrop of sputtering European stock markets, with investors continuing to digest the German constitutional court ruling that some of the measures the Bundesbank is taking under the ECB's Public Sector Purchase Program are not covered by EU law (although, crucially, refraining from ruling that the ECB's asset purchase program violate its mandate). EUR-USD fell nearly 0.5% in printing a 12-day low at 1.0787. The puts the pair further 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 EUR-USD to lack sustained directional bias for now, though the somewhat frayed politics of the eurozone tips the balance toward downside. There is little divergence in central bank policy, with both the ECB and the Fed are pursuing aggressive easing policies, with both Europe and the U.S. facing significant economic headwinds from virus-containing lockdown measures. Both Europe and the U.S. are also now pursing economic reopening strategies.

    [USD, JPY]
    USD-JPY edged out a fresh seven-week low, at 106.21, while EUR-JPY posted a three-and-a-half year low at 114.62 reflecting both yen safe-haven driven outperformance and euro underperformance. Tokyo markets remained closed for Japan's Golden Week holidays, and will reopen tomorrow. We expect the Japanese currency to remain apt to outperformance, partly on the view that stock markets may have been factoring in an overly optimistic impact from phased economic reopening, and partly due to the Trump administration ratcheting up its accusations against China about the origin of the coronavirus pandemic. 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]
    The pound has taken a rotation lower amid a backdrop of flagging European stock markets. The biggest declines have been seen against the dollar and yen, with the pound down by 0.5% and 0.7%, respectively, against the two outperformers, which have been gathering safe haven demand. This has pushed Cable below recent lows, to a nine-day low at 1.2359, nearing the April-21 low at 1.2347. A breach below the latter would put the pairing in one-month low terrain. GBP-JPY has descended into six-week territory, while EUR-GBP has retraced some of the declines seen yesterday, after the German constitutional court ruling on the ECB. The UK's April construction PMI put in an eye-watering plummet to a headline reading of just 8.2, down from 39.3 in March, missing the median forecast for a 22.2 reading, although still not much of a surprise in the lockdown era, with markets largely desensitized to bad economic data. The pound's underperformance fits the pandemic era characteristic of the currency to correlate with global stock market direction (i.e. risk appetite), similar to a high beta commodity currency. While Cable is up by over 8% from the 35-year low seen in mid March, the pair remains down by nearly 7% on the year-to-date, and is the first time since the 1980s that the pound has consistently traded below 1.3000. Part of the reason for this is a built-in Brext-risk discount, with the UK government have repeated affirmed that the UK will leave transitional membership of the EU's single market at year-end, even with a new trade deal being in place. The other main reason is the UK's vulnerability in the pandemic crisis era, which is a consequence of UK's open economy, current account deficit and outsized financial sector.

    [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 has ebbed to the lower 1.40s, though has so far remained above yesterday's five-day low at 1.4006. The Canadian currency, along with other oil-correlating currencies, has been underpinned a continued rise in oil pricers. June WTI crude futures posted a fresh three-week high at $25.57, marking a gain of over 250% from the low seen on April 28th, though prices still remain down by over 70% from the highs seen in January. Goldman Sachs research this week raised its 2021 oil price forecast to $51. The 8% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the near 4% 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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