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By XE Market Analysis May 19, 2020 7:44 am
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    XE Market Analysis: North America - May 19, 2020

    The dollar has remained soft even though the strong stock market seen over the last day flagged during the European morning session. The euro, meanwhile, rallied against most currencies on rare good-news from the data front, with the forward-looking German ZEW investor confidence for May surging back to a 51.0 headline reading -- the highest since April 2015 -- after the 28.2 outcome in April and the -49.5 low that was seen in March. The current conditions component of the survey still reached a new low of -93.4, however. Another euro positive was proposals for a EUR 500 bln EU recovery fund. EUR-USD gained by over 0.5% in printing a 15-day high at 1.0957, extending the rebound from the 12-day low seen last week at 1.0776. This helped drive the narrow trade-weighted USD index to an eight-day low at 99.23. Cable logged a six-day high at 1.2268, extending the rebound from the seven-and-a-half-week low that was seen yesterday at 1.2075. The pound has also seen gains versus the euro and yen, while holding its own against the outperforming commodity currencies. AUD-USD posted an eight-day high at 0.6564, with the Aussie supported by the strong gains in equity markets over the last day, despite the moderate correction in Europe, and despite China confirming an 80% tariff on its imports of Australian barley. Beijing is also reportedly considering also targeting Australian wine and dairy, in response to Australia's accusations about China's role in the pandemic. USD-CAD edged out an eight-day low at 1.3905. USD-JPY rose to a one-week high at 107.60, driven by yen underperformance. Markets, on the one hand, are factoring reopening economies, developments on the vaccine front for the SARS Cov-2 coronavirus, and fresh pledges for further stimulus if necessary from the Fed, ECB and other central banks, and on the other, concerns about the ratcheting-up tensions between the U.S. and China, and Australia and China.

    [EUR, USD]
    EUR-USD has gained nearly 0.5% in printing a 15-day high at 1.0957, extending the rebound from the 12-day low seen last week at 1.0775. The latest up phase was facilitated by rare good-news from the data front, with the forward-looking German ZEW investor confidence for May surging back to a 51.0 headline reading -- the highest since April 2015 -- after the 28.2 outcome in April and the -49.5 low that was seen in March. The current conditions component of the survey still reached a new low of -93.4, however. EUR-USD had earlier been supported by broader dollar weakness as the currency saw some of its safe haven premium unwind amid a backdrop of rallying stock markets in Asia, which followed solid Wall Street gains yesterday, though European equities have since flagged, and S&P 500 futures are now showing modest losses. One the one hand, markets are factoring reopening economies, positive news on the development of a vaccine for the SARS Cov-2 coronavirus, and fresh pledges for further stimulus if necessary from the Fed, ECB and other central banks, and on the other, concerns about the ratcheting-up tensions between the U.S. and China, and Australia and China. EUR-USD continues to trade in a broad consolidation range near the halfway mark of the volatile range that was seen during the height of the global market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. We expect the pair to lack sustained directional bias for now. There is little divergence in central bank policy currently, with both the ECB and the Fed pursuing aggressive easing policies, with both Europe and the U.S. facing significant economic headwinds from virus-containing lockdown measures.

    [USD, JPY]
    The yen has been weakening against most currencies today following the surge in global equity markets over the last day, and has remained soft even as equities in Europe flagged. USD-JPY rose to a one-week high at 107.60. The Japanese currency has seen a bigger magnitude of decline against the commodity currencies. Markets continue to largely overlook domestic developments in Japan. Data today showed March final confirming industrial production to have contracted 3.7% m/m. Japanese Q1 GDP numbers, released yesterday, confirmed that Japan is deep in recession, although slightly better than expected at -1.9% q/q. Markets have long been desensitized to incoming data, which currently is largely showing a backward-looking snapshot of economies in lockdown. Another 5.0-plus magnitude earthquake, this time near the Gifu prefecture, was reported today.

    [GBP, USD]
    Cable logged a six-day high at 1.2268, extending the rebound from the seven-and-a-half-week low that was seen yesterday at 1.2075. The pound has also seen gains versus the euro and yen, while holding its own against the outperforming commodity currencies. The UK currency has been apt to correlate positively with global stock market direction over the period of the pandemic so far. UK labour market data out today revealed a massive 856.5k spike in jobless claims in April, reflecting the impact of the lockdown, while the figures for March employment cover a period preceding the lockdown (which began on March 23rd in the UK), and showed the unemployment rate actually dipping, to a rate of 3.9% from 4.0% in February. Average household earnings data also preceded the lockdown, and showed a dip to a growth rate of 2.4% y/y in the three months to March in the with-bonus figure, down from 2.8% y/y in the three months to February.

    [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 edged out an eight-day low at 1.3905, reflecting part broad weakness in the U.S. dollar and part outperformance in the Canadian dollar, which has been lifted by a backdrop of rallying global stock markets over the last day (despite a pull back in European markets). Front-month WTI oil prices have settled today a little off the nine-week high that was seen yesterday at $33.32. Oil prices are likely to remain support amid signs of dropping supply and rising output as global economies reopen from lockdowns. Last Friday, data showed operating U.S. oil and natural gas rigs to have fallen to a record low for a second consecutive week.

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