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By XE Market Analysis May 12, 2020 7:34 am
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    XE Market Analysis: North America - May 12, 2020

    The dollar retreated after posting an 18-day high at 100.44, as measured by the narrow trade-weighted DXY index. EUR-USD concurrently rebounded to a high of 1.0837 after posting a five-day low at 1.0784. The dollar's biggest decline was seen against the commodity currencies, which rebounded during the London morning after underperforming during the Asia-Pacific session, correlating inversely with stock markets, with European stock markets rallying after a mostly negative day across Asia-Pacific bourses. AUD-USD was showing a 0.5% gain in printing a high at 0.6518 after earlier showing a loss of a similar magnitude, which left a five-day low at 0.6432. Other commodity currencies saw a similar down-then-up price action. USD-CAD lifted to a five-day high at 1.4065 before subsequently falling to a 1.3977 low. USD-JPY, meanwhile, has been trading with little direction, plying a narrow range just below the 19-day low seen yesterday at 107.78. June WTI oil prices rose by over 5% in returning to levels around $25.50, nearing the one-month high seen last week at$ 26.08. The pan-Europe Stoxx 600 equity index gained 0.5%. There is a battle between glass-half-full and glass-half-empty viewpoints in markets. On the half-full side, China announced a new list of U.S. imports eligible for tariff waivers, helping allay at least some investor concerns about the fraying in U.S.-China relations, while major economies are continuing to reopen after lockdowns. On the half-empty side are concerns about the risk of a second wave of coronavirus infections as economies reopen from lockdowns. Wuhan in China, the origin of the virus, reported new infections yesterday, as did South Korea, and Russian reported a record daily increase in confirmed cases. German has also seen its "R rate" (the reproduction rate of the virus) rise back above 1, indicating that the virus is spreading exponentially again.

    [EUR, USD]
    EUR-USD edged out a five-day low at 1.0784 on the back of dollar firmness, before recouping to near net unchanged levels in the lower 1.0800s. The pair 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. Europe and the U.S. are now in the early stages of economic reopening strategies.

    [USD, JPY]
    USD-JPY has been plying a narrow range below the 19-day low seen yesterday at 107.78, though the yen has gained against commodity and many developing-world currencies today amid an evolving risk-on trade. Asian stock markets have been under water, although many markets in the region have seen a paring in declines during their respective afternoon sessions after China announced a new list of U.S. imports eligible for tariff waivers. China's state-run Global Times had earlier reported that "unidentified advisers" on the Chinese side were keen to invalidate the "Phase 1" trade deal and renegotiate it, to which President Trump responded with, "not interested. We signed a deal." Aside from the fraying in relations between the world's two biggest economic superpowers, markets are concerned about the risk of a second wave of coronavirus infections as economies reopen from lockdowns. Wuhan in China, the origin of the virus, reported new infections yesterday, as did South Korea, and Russian reported a record daily increase in confirmed cases. German has also seen its "R rate" (the reproduction rate of the virus) rise back above 1, indicating that the virus is spreading exponentially again. The combo of trade and geopolitical tensions and fears of a second wave of coronavirus infections, looks set to keep risk-off positioning in play, which in turn should be supportive of the yen versus most other currencies.

    [GBP, USD]
    Cable has remained heavy after yesterday posting a five-day low at 1.2284. The pairing is back in the lower reaches of the range that's been prevailing since early April, which in turn marks a consolidation of the gains seen out of the 35-year low at 1.1409 that was seen in mid March. Sterling has become apt to correlate with global stock market direction do far in the era of the pandemic crisis. The UK has proved vulnerable to the pandemic, both economically, due to the nation's open economy, current account deficit, and outsized financial sector, and in terms on contagion, as a consequence the major international hub that is London, which served as a gateway for the coronavirus to spread throughout the UK. The UK currently has just over 219k confirmed cases, which is the fourth highest national total in the world (after the U.S., Spain and Russia), and the second highest Covid-19 deaths (at nearly 32k). Despite the high totals, reported cases are now in decline and the UK yesterday commenced its first baby-step to reopening its economy, with non-essential manufacturing reopening. The UK and EU, meanwhile, have commenced the next round of trade talks. The British government has continued to insist that there will be no delay in the UK's end-of-year departure from its Brexit transition membership of the EU's customs union and single market. The UK has until July 1st to commit to this, so the pressure is on negotiators. Markets will continue to factor in a risk that the UK leaves the EU at the end of the year without a new trade deal, as many analysts see there is insufficient time to negotiate a new deal, even though the two sides are starting from perfect equivalence. Leaving the single market (which includes 40 free trade deals with global economies) without a new trade deal in place would mean a large portion of the UK's trade would switch to much less favourable WTO terms and conditions.

    [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 a five-day high at 1.4065, with the Canadian dollar having weakened amid a backdrop of flagging global stock markets amid concerns about fraying relations between the U.S. and China at a time when news of various upticks in the coronavirus rates of infections in various major economies is fanning fears of there being second waves in infection rates, with nations only just beginning to reopen from lockdowns. USD-CAD yesterday posted a 12-day low at 1.3901 before rebounding. Oil prices are moderately firmer today, continuing to consolidating off the one-month high seen last week at $26.08 (June WTI pricing). The high marked a 258% rebound from the April-28th low at $10.07. Prices still remain down by over 60% from the January high, and well off the average price that has prevailing in recent years. The massive rotation lower in oil prices, caused by a supply/demand imbalance of historic proportions as a consequence of virus-containing lockdown measures in many global economies, marks a significant deterioration in Canada's terms of trade, given the importance of oil exports to the nation. The 8% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the 4%-plus decline against the euro and near 8% 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. All going well, this would rekindle demand for oil and other commodities, which should in turn put in an underpinning for the Canada's currency. Goldman Sachs is forecasting crude prices at $51 in 2021. There is a risk of setbacks, of course, in the event that reopenings cause a significant second wave of infections.

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