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By XE Market Analysis May 7, 2020 7:27 am
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    XE Market Analysis: North America - May 07, 2020

    The commodity currencies have traded firmer, boosted by an unexpectedly good trade report out of China, which reported a 8.2% y/y rise in exports, contrary to the median forecast for a 14.1% contraction. The data helped Asian stock markets pare intraday losses, and European stocks to rally, offsetting fresh volleys of anti-China rhetoric from U.S. President Trump and his Secretary of State, Pompeo (Trump focusing on trade, Pompeo on the coronavirus pandemic). AUD-USD rose by over 1% in posting a high at 0.6473, and AUD-JPY rose by nearly 1.5%. The Kiwi dollar also gained, as did the Canadian dollar. USD-CAD, after posting a two-week high at 1.4163, ebbed back under 1.4100. The dollar pared gains. The narrow traded-weighted USD index (DXY) dipped under 100.00 after earlier edging out a 10-day high at 100.23. EUR-USD edged out a new 13-day low at 1.0778. The yen has corrected after a period of outperformance. USD-JPY climbed above 106.50, putting in some distance from yesterday's seven-week low at 105.98. EUR-JPY has also staged a rebound after dropping sharply in recent sessions, which yesterday left a three-and-a-half-year low at 114.43. The pound reversed intraday gains seen in the immediate wake of the BoE policy announcement, with BoE Governor Bailey following up in his post-meeting press conference by emphasizing that the central bank is not out of monetary policy ammunition while pledging appropriate policy responses will be taken, going forward. Cable dropped back to he mid 1.2300s after earlier printing a high at 1.2418. Ahead of the BoE announcement, the pound had posted a 13-day low at 1.2310. The BoE left is policy framework unchanged following its May MPC meeting, as was widely anticipated with the central bank having already responded to the consequences of the pandemic crisis.

    [EUR, USD]
    EUR-USD edged out a new 13-day low at 1.0778. The pair continues to trade 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 risk. There is little divergence in central bank policy currently, 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 reopeing strategies, too.

    [USD, JPY]
    The yen has corrected after a period of outperformance, amid a back of rising global stock markets. USD-JPY climbed above 106.50, putting in some distance from yesterday's seven-week low at 105.98. EUR-JPY has also staged a rebound after dropping sharply in recent sessions, which yesterday left a three-and-a-half-year low at 114.43. AUD-JPY rallied by over 1% as the Japanese currency lost ground to the commodity currencies following an unexpected 8.2% y/y rise in Chinese exports in April, contrary to the median forecast for a 14.1% contraction, which lifted stock markets in Asia. The Chinese data offset a fresh volleys of anti-China rhetoric from U.S. President Trump and his Secretary of State, Pompeo (Trump focusing on trade, Pompeo on the coronavirus pandemic). Going forward, 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 economic superpowers is more than just electoral politics. The U.S., and other Western nations, have growing uneasy about China's power in multilateral organisations, such as the World Health Organisation and World Bank, feeling a need to reassert itself. The pandemic, coupled with the rapidly deteriorating tensions between the U.S. and China, is likely to be disruptive for global markets, which should in turn maintain safe-haven demand for the yen.

    [GBP, USD]
    The pound has erased earlier gains seen in the immediate wake of the BoE policy announcement, with BoE Governor Bailey following up in his post-meeting press conference by emphasizing that the central bank is not out of monetary policy ammunition while pledging appropriate policy responses will be taken, going forward. He also said that information about the easing in lockdown measures will be material at the June meeting of the Monetary Policy Committee. Bailey also stated that the BoE will reach it current QE target by July. The pound had initially lifted on Bailey's remark that he expects the recovery from the lockdown to be much more rapid than from the global financial crisis of 2008/9. Cable dropped back to he mid 1.2300s after earlier printing a high at 1.2418. Ahead of the BoE announcement, the pound had posted a 13-day low at 1.2310. The BoE left is policy framework unchanged following its May MPC meeting, as was widely anticipated with the central bank having already responded to the consequences of the pandemic crisis. There was dovish dissension in the ranks, with two of the nine member policy committee (Saunders and Haskel) voting for an increase in QE. The pound has developed a distinct pandemic era characteristic of correlating closely with global stock market direction (i.e. risk appetite), similar to a high beta commodity currency. While Cable is up by about 8.5% from the 35-year low seen in mid March, the pair remains down by about 6.5% on the year-to-date, and is the first time since the 1980s that the pound has consistently traded below 1.3000. UK Prime Minister Johnson will on Sunday detail the first phase of reopening in the UK, having been in lockdown since March 23rd, which will start on Monday.

    [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 ebbed back under 1.4100 after earlier posting a two-week high at 1.4163. Softer oil prices had been weighing on the Canadian dollar before unexpectedly good trade report out of China, which reported a 8.2% y/y rise in exports, contrary to the median forecast for a 14.1% contraction, catalysed a about of risk appetite, which lifted the Loonie and other commodity currencies. June WTI crude futures posted a two-day low near $23.50, correcting after scaling to a three-week high yesterday. Crude prices remain up by over 230% from the low seen near $10 on April 28th, though prices still remain down by over 74% from the highs seen in January. Goldman Sachs research this week raised its 2021 oil price forecast to $51. The 8.5% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the 4%-plus decline against the euro and near 10% drop versus the yen, reflects the pricing-in of this reality (the erosion in Canada's terms of trade) 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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