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By XE Market Analysis May 26, 2020 7:23 am
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    XE Market Analysis: North America - May 26, 2020

    The dollar and yen have weakened against most other currencies as risk appetite came coursing back. The narrow trade-weighted USD index (DXY) dipped by over 0.3% in printing a five-day low at 99.60, correcting from yesterday's eight-day high at 99.97. EUR-USD concurrently lifted to a five-day high at 1.0973. Sterling, which is continuing to correlate with global stock markets, surged by over 1% to a thirteen-day high at 1.2326, while GBP-JPY has risen by a similar magnitude in printing a two-week peak, and EUR-GBP has fallen to eight-day lows under 0.8900. EUR-JPY hit a five-day, respectively, while yen underperformance lifted USD-JPY to a six-day high at 107.93. The commodity currencies have, not surprisingly, been outperforming. AUD-USD rallied by over 1% in pegging an 11-week high at 0.6587. USD-CAD dropped to a four-week low at 1.3848. July WTI crude prices gained by over 3% in posting a high at $34.54, which is just 12 cents shy of the 11-week high that was seen last week. In stock markets, Japan's Nikkei 225 closed up by 2.55%, its highest since March 5. The Hang Seng and the Shanghai Composite index also rallied, the former by 1.8% and the latter by 1%. S&P 500 futures were showing a 1.8% gain, as of the early European PM session, pointing to a solid opening on Wall Street. Ongoing news of economic reopening around the world, along with cheap money, have fed the risk-on theme, which is offsetting the rising tensions between the U.S. and China. Hopes for a rapid development of a vaccine for the coronavirus is also in the mix. U.S. firm Novavax says it has begun enrolling participants in the first human study of its vaccine, while Oxford University is now already weeks into human tests, and say its vaccine could be ready as soon as September. Germany's Ifo institute said that the mood among exporters has improved. The Hong Kong situation, meanwhile, continues to bubble. Hong Kong trade unions called for general strike on May 27th in response to China's proposed National Security Law. The U.S. has stated it will take measures if the law is implemented.

    [EUR, USD]
    EUR-USD ebbed to a one-week low at 1.0871, driven by broad, albeit moderate, buoyancy in the dollar, which is finding a degree of safe haven demand as weekend developments showed a continued rise in U.S.-China tensions. Hong Kong has re-emerged as a flash point in U.S.-China, and West-China, relations. The narrow trade-weighted USD index edged out a one-week high at 99.97. 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, though political tensions among Eurozone members, coupled with the dollar's role as a haven, suggest the risks are to the downside. 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]
    The yen has underperformed as risk appetite came coursing back. EUR-JPY and GBP-JPY hit five-day and two-week highs, respectively, while yen underperformance lifted USD-JPY to a six-day high at 107.93. The biggest losses the Japanese currency has seen have been against the commodity currencies. In stock markets, Japan's Nikkei 225 closed up by 2.55%, its highest since March 5. The Hang Seng and the Shanghai Composite index also rallied, the former by 1.9% and the latter by about 1%. S&P 500 futures were showing a 2% gain, as of the late London AM session, pointing to a solid opening on Wall Street. Ongoing news of economic reopening around the world, along with cheap money, have fed the risk-on theme, which is offsetting the rising tensions between the U.S. and China. Hopes for a rapid development of a vaccine for the coronavirus is also in the mix. U.S. firm Novavax says it has begun enrolling participants in the first human study of its vaccine, which Oxford University is now already weeks into human tests, and say its vaccine could be ready as soon as September. Germany's Ifo institute said that the mood among exporters has improved. The Hong Kong situation remains a flashpoint between the West and China. Hong Kong trade unions called for general strike on May 27th in response to China's proposed National Security Law.

    [GBP, USD]
    Sterling has surged amid a back of coursing risk-on positioning, with the UK currency continuing its strong pandemic-era correlate with global stock markets. The currency has gained over 1% in posting a thirteen-day high at 1.2326, while GBP-JPY has risen by a similar magnitude in printing a two-week peak, and EUR-GBP has fallen to eight-day lows under 0.8900. Despite the current gains, we remain bearish of the pound, given the risk of the UK leaving its post-Brexit transition membership of the EU's single market at year-end. UK-EU trade negotiations are coming to a head, with only one final round of talks left until the mid-June EU Council meeting. The UK has until July-1st to decide whether it wants to extend is post-Brexit transition membership of the EU's single market (which includes 40 free-trade deals with global economies) beyond year-end. The UK government has repeatedly insisted that it is quite prepared to leave should it not get what it wants in a trade deal. This is a "threaten-to-walk-away" negotiation bluff, to a degree, though will nonetheless curtail the pound's upside potential. Leaving the EU's single market would, overnight, put a large portion of UK trade on less favourable WTO terms. The prevailing consensus is that the UK will neither ask for or obtain an extension of its transition membership of the EU's single market. Most likely a compromise will be found at the last minute, as are apt to happen in negotiations, though we still think there is a chance that the UK will ask for a one-year extension. The pound will remain the main conduit of market sentiment with regard to the UK-EU trade talks, and we can expect the forex market it to be increasingly reactive to news on this front over the coming weeks.

    [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 dropped to a five-day low at 1.3922. The oil-correlating Canadian dollar has been underpinned by rising global stock markets on continuing reopening of global economies and hopes for a rapid development of a coronavirus vaccine. July WTI crude prices gained by over 3% in posting a high at $34.54, which is just 12 cents shy of the 11-week high that was seen last week. An FT on a report at the weekend detailed a sharp drop in U.S. oil output, with further declines expected later in 2020, with many oil mining operations there having been rendered unviable at prevailing prices. This chimes with last Friday's weekly Baker-Hughes rig count, which revealed another 21 oil rigs were shuttered in the U.S., to bring the the tally to 237 after what is now the 10th straight week of closures. Recent dips in oil inventories have also illustrated shifting fundamentals, with reopening economies around the world stimulating more demand, just as supply continues to ebb. Good reason to be bullish of the Canadian dollar. Note that BoC Governor Poloz will be speaking today, along with his deputy.

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