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By XE Market Analysis May 14, 2020 7:06 am
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    XE Market Analysis: North America - May 14, 2020

    The dollar and yen have picked up safe haven demand as Wall Street once again led a rotation lower in global equity markets. The narrow trade-weighted USD index printed a two-day high at 100.41, while EUR-USD concurrently edged out a two-day low at 1.0790. Yen outperformance weighed on USD-JPY, driving the pair below 107.00 and to a low so far at 106.78, which is 4 pips shy of yesterday's low. EUR-JPY posted a three-day low at 115.36. The biggest decliners have been the commodity currencies. AUD-USD, now amid a fourth consecutive day of decline, fell to a one-week low at 0.6421. An even worse than expected Australian employment report added pressure to the antipodean currencies. Employment in Australian dove 594.3K in April. Amid the ensuing risk-off theme, the governors of the BoJ and RBNZ re-emphasized their "do what it takes" mantra, which followed Fed chair Powell's grim warning of an "extended period" of weak economic growth, citing concerns about how long it take for a vaccine to be ready and widely available, and how well future outbreaks of the virus could be contained. Equity market narratives are becoming much more circumspect about the outlook, with few now talking-up prospects for a V-shaped recovery. Goldman Sachs research, for instance, highlighted that investors have been dismissing bank loan losses totalling, in the U.S., $103 bln over the next four quarters, along with domestic and global political uncertainty. It's also becoming clear that the phased reopening of economies doesn't mean there will be a full reopening of economies anytime soon, and even if there was, the behavioural adjustment of consumers is significant. The S&P 500, which had rallied by more than 30% in just over a month, is now down by over 4% since late April.

    [EUR, USD]
    EUR-USD has been entrenched in a narrow range near 1.0850, holding below yesterday's eight-day high at 1.0885. The high was a product of dollar weakness. Amid concerns about a second wave of coronavirus infections as economies reopen, and with disinflationary pressures taking a grip, and U.S. money markets pricing in the negative interest rates, the pressure is mounting on the Fed, which has been weighing on the dollar. The spotlight is now on today's speech by Fed chair Powell (from 09:00 ET/13:00 GMT). We expect him to dismiss the view that rates will be eased below zero by the end of the year, a stance he's indicated several times of late. His colleague Bullard yesterday dismissed negative interest rates, arguing that an expansion in QE would be a better policy option, if needed. EUR-USD is trading 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]
    The yen picked up safe-haven demand amid a backdrop of tumbling global stock markets. USD-JPY fell below 107.00 in making a low so far at 106.81. The combo of tensions between the U.S. and China, 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. 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 this week, 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]
    The pound has come under pressure against the safe haven dollar and yen, and also the euro and other currencies. The uncertain tone in global equity markets has translated to weakness in the pound, which has developed a quite strong positive correlation with stock market direction during the pandemic era to far. Cable printed a 37-day low at 1.2182, which has swung the early-April low at 1.2164 into scope. That low marks the nadir 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. Despite the high infection rate and death total in the UK, the country this week has initiated a baby-step toward reopening its economy this week, with non-essential manufacturing reopening. The UK and EU are, meanwhile, amid 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 has settled just off the one-week high that was seen yesterday at 1.4116. The high was seen as oil prices posted one-month highs, which had weighted on the Canadian dollar. June WTI crude prices printed a high at $26.45, and have since been consolidating at moderately softer levels. While oil prices are up by over 250% from the April-28th low, crude prices are still 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 9% 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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