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By XE Market Analysis May 21, 2020 7:17 am
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    XE Market Analysis: North America - May 21, 2020

    The dollar has picked up safe haven demand as stock markets flagged in Europe and the Asia-Pacific region, and with S&P 500 futures correcting most of the gains seen during Wednesday's regular session on Wall Street. The narrow trade-weighted USD index rebounded to a high at 99.43, up from the 17-day low seen yesterday at 99.01. The biggest mover out of the main currencies has been AUD-USD, which dropped by nearly 0.5% in printing a low at 0.6549, correcting from yesterday's 10-week high at 0.6618. Another ratchet higher in the U.S. attacks on China catalysed a risk-off mood in markets, with the White House publishing a 20-page dossier of complaint on China, accusing Beijing of predatory economic policies, military build-up, disinformation, human rights violations. A senior administration official was reported a saying that this does not signal a shift in U.S. policy, and while some may downplay it as part of President Trump's election strategy, it is clear that the U.S, and other Western nations, have been growing uneasy about China's power on the world stage. Given the potential and realized impact on trade, this is fostering a re-emergence of nervousness in markets. In other news, RBA Governor Lowe warned that without a Covid-19 medical breakthrough the economic recovery will be slow. The New Zealand government said it will allow bars to reopen, and that it is considering a four-day work week. On the data front, preliminary May PMIs in the UK and Eurozone showed a bigger than expected bounce from April's record lows, while the PMIs for Australia and Japan showed predictably sharp contractions for manufacturing along with and a deeply contracted but improved reading for services. Export data from South Korea and Japan were also weak. Oil prices have remained buoyant, with front-month WTI crude prices yesterday hitting a 10-week high at $34.43.

    [EUR, USD]
    EUR-USD has dipped on dollar demand after the pair yesterday posted a 10-day high at 1.1000. A correction low has been logged at 1.0951. The U.S. currency picked up safe haven demand as stock markets flagged in the Asia-Pacific region, and with S&P 500 futures correcting most of the gains seen during Wednesday's regular session on Wall Street. The narrow trade-weighted USD index rebounded to a high at 99.43, up from the 17-day low seen yesterday at 99.01. Concerns about another ratchet higher in U.S.-China tensions has been afoot, which has richened the dollar' safe haven premium. 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 lifted to an intraday high at 107.86 amid a bout of dollar outperformance, but the pair has remained shy of yesterday's peak at 107.99. The yen fared betted against the commodity currencies, which corrected amid a backdrop of flagging stock markets in the Asia-Pacific region and Europe today, and with S&P 500 futures correcting most of the gains seen during Wednesday's regular session on Wall Street. Another ratchet higher in the U.S. attacks on China catalysed a risk-off mood in markets, with the White House publishing a 20-page dossier of complaint on China, accusing Beijing of predatory economic policies, military build-up, disinformation, human rights violations. A senior administration official was reported a saying that this does not signal a shift in U.S. policy, and while some may downplay it as part of President Trump's election strategy, it is clear that the U.S, and other Western nations, have been growing uneasy about China's power on the world stage, and are feeling a need to reassert themselves. Given the potential and realized impact on trade, this is fostering a re-emergence of nervousness in markets. Should this unease persist, this would support the yen against most other currencies, particularly the commodity correlating ones and many developing world currencies.

    [GBP, USD]
    Sterling rose by some 30 pips against the dollar in the wake of the above-forecast UK PMI release, reaching a post-data peak so far of 1.2234 before capping out, leaving the intraday high at 1.2255 as yet unchallenged. The pound also gained versus the euro and other currencies.The preliminary May UK composite PMI rebounded more than expected, as did both of the underlying manufacturing and services PMI readings. The composite headline came in at 28.9, springing back from the data-series record low that was seen in April at 13.8. The median forecast had been for a more restrained rebound to 24.0. The respective manufacturing and services PMI readings came in at 40.6 and 27.8, rebounding from 32.6 and 13.4 in the month prior, with both overshooting their median forecasts. The composite figure, at 28.9, still, of course, signals ongoing sharp contraction in the UK's private-sector economy. On a brighter note, business confidence for the next 12 months continued to improve from the series record low seen in March, though respondents still widely commented on concerns that customer demand would take a long time to recover to levels seen before the public health crisis. We don't see that the pound has too much upside potential from here, given ongoing the risk that the UK leaves its post-Brexit transition membership of the EU's single market at year-end.

    [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 to a consolidation of recent losses, above the three-week low that was seen on Tuesday at 1.3864. The prospect 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 10-week high at $34.43. Oil prices are now amid their fourth consecutive week of gains. The EIA inventory data out of the U.S. yesterday showed a 5.0 mln bbl fall in crude stocks, thwarting the consensus forecast for a 1.0 mln bbl increase. This confirmed that the API report had showed on the day before. The inventory data 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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