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By XE Market Analysis May 20, 2020 7:15 am
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    XE Market Analysis: North America - May 20, 2020

    The dollar majors have been seeing narrow ranges while commodity currencies have lifted. Stock markets flagged somewhat in Asia and Europe, though S&P 500 futures have rallied by over 1%, pointing to a reversal of yesterday's losses at the open of Wall Street today. There remains a level of dissonance in market sentiment, between the reopening of locked-down economies on the one hand, and tensions between the U.S. and China and Australian and China (which are translating into tariffs on trade) on the other. Regarding Aussie vs China spat, an editorial in China's state-controlled Global Times today described Australia as being a "giant kangaroo that serves as a dog to the U.S.". Markets have also been dealt a lesson in placing too much optimism in a quick vaccine solution to the coronavirus pandemic. Overall, the momentum of reopening economies is maintaining a sense of optimism in markets. Incoming data to Japan (Tankan business survey and machinery orders), Australia (retail sales) and the UK and Eurozone (inflation), have had little impact, with markets remaining desensitized to data as investors try an fathom the scope for economic rebound as economies reopen. China said that 95.4% of major industrial firms employees have now returned to work, while Japan's deputy head of the coronavirus panel warned of a possible new wave of infections before winter. In currencies, EUR-USD traded slightly firmer, to levels around 1.0950-60, but remained shy of the 16-day high seen Tuesday at 1.0977. USD-JPY posted a sub-40-pip range in the upper 107.00s. AUD-USD rallied to a fresh 10-week high at0.6578. The New Zealand dollar outperformed after RBNZ Governor Orr said he is not considering going negative with interest rates at this juncture. NZD-USD surged to a nine-day peak at 0.6138. USD-CAD remained heavy after yesterday printing a three-week low at 1.3864. Front-month WTI prices consolidated lower from the nine-week high seen yesterday at $33.44.

    [EUR, USD]
    EUR-USD has traded slightly firmer today, to levels in the mid 1.0900, but the pair has remained shy of the 16-day high seen Tuesday at 1.0977. The common currency found domestically-driven support yesterday from 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, while today's release of final Eurozone inflation data was revised down to just 0.3% y/y. On the U.S. side of the pond today, the FOMC minutes from the April 28th-29th policy meeting are due, but we doubt there will be any fresh revelations as the Fed is "all-in." The markets will look to see if there's any leaning toward negative rates, though we doubt it. There's also Fedspeak from Bostic and Bullard. The data slate is light, with just weekly MBA mortgage and oil inventory figures up. 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 aggressively accommodative policy, with both Europe and the U.S. facing significant economic headwinds from virus-containing lockdown measures. Both are amid the early stages or reopening from lockdowns.

    [USD, JPY]
    USD-JPY has posted a sub-40-pip range in the upper 107.00s so far today (as of the early London PM session). The yen has seen little direction against the euro, and other currencies, though has declined against the outperforming commodity currencies. NZD-JPY, for instance, lifted into three-week high territory. Stock markets have been choppy amid the dissonance between the reopening of locked-down economies and tensions between the U.S. and China and Australian and China (which are translating into tariffs on trade). Markets have also been dealt a lesson in placing too much optimism in a quick vaccine solution to the coronavirus pandemic. Incoming data out of Japan, which today included the latest quarterly Tankan business survey (which unsurprisingly showed sentiment to be at a decade low) and March machinery orders (which were less worse than expected in contracting by just 0.4% m/m, though this is a notoriously volatile month-to-month data series), had little market impact. Other recent data out of Japan showed March final confirming industrial production to have contracted 3.7% m/m, while Japanese Q1 GDP numbers 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. Japan's deputy head of the coronavirus panel warned of a possible new wave of infections before winter. The principal driven of yen direction will continue to be global stock market direction, to which the yen has an enduring negative correlation with.

    [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 has remained heavy after yesterday printing a three-week low at 1.3864. The prospective for the Canadian dollar appears to be of the bullish variety given the currency's link with oil prices. Front-month WTI prices, while consolidating at slightly softer levels today, yesterday hit a nine-week high at $33.44. The high was seen after the American Petroleum Association reported a 4.8 mln barrel draw on crude inventories in the world's biggest economy in the week ending May 15th, contrary to the median forecast for a 2.4 mln barrel inventory build. This evidenced the impact of both oil output cuts by both U.S. producers and members of the OPEC+ group, along with rising demand as major economies reopen from lockdown (which has seen a massive increase in traffic, among other oil-consuming activities). We remain bullish on the Canadian dollar, which continues to trade at a discount following the sharp drop in oil prices over the March-April period. The April-30th low at 1.3848 provides a downside waypoint for Canadian dollar bulls, marking the lowest point the pair has traded since mid March. We see scope for a return to levels around 1.3500.

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