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By XE Market Analysis May 29, 2020 6:57 am
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    XE Market Analysis: North America - May 29, 2020

    The yen has strengthened amid a sputtering price action in global equity markets, while the dollar, despite this backdrop, underperformed, including against commodity currencies. USD-JPY fell nearly 0.5% in posting an 11-day low at 107.08. EUR-JPY ebbed by about 0.3%, retracing around a half of yesterday's rally in making a low at 118.18, which had produced a two-month high at 119.42. AUD-JPY also traded softer, though remained shy of its low from yesterday. The narrow trade-weighted USD index, meanwhile, fell to its lowest level since March 17th, at 98.26, which nearly unwinds the premium the dollar has been trading with since the pandemic crisis erupted. EUR-USD concurrently pegged a two-month high at 1.1137, extending gains after breaking above its 200-day moving average yesterday, and Cable made a three-day high at 1.2358. In the stock market realm, S&P 500 futures were showing a 0.3% loss, as of the early European afternoon, while the pan-Europe STOXX 600 was down 0.8%. Most Asia-Pacific markets finished lower, though not by a large magnitude. The Hang Seng underperformed with a 0.7% closing loss, while the Shanghai Composite managed a 0.2% gain. Concerns about the U.S.-China, West-China stand-off are mounting following Beijing's implementation of its Hong Kong security law yesterday. President Trump will be giving a news conference later today on the U.S. response to China's democracy-quashing move. He is expected to revoke Hong Kong's "special status" (which will have far reaching implications on the territory's status a global financial hub) and outline sanctions, among other measures. Meanwhile, a senior Chinese general spoke today of both "peaceful and military options" to resolve the "Taiwan problem." A raft of month-end date releases out of Japan and Europe had little impact. On the coronavirus front, a spike in confirmed infections in South Korea has led to a reintroduction of lockdown measures.

    [EUR, USD]
    EUR-USD pegged a fresh two-month high at 1.1137, extending gains after breaking above its 200-day moving average yesterday. The gains are concomitant with the narrow trade-weighted USD index falling to its lowest level since March 17th, at 98.09, which nearly unwinds the premium the dollar has been trading with since the pandemic crisis erupted. There is a risk that the dollar rebounds on a safe-haven bid. Concerns about the U.S.-China, and more broadly the West-China, stand-off are mounting following Beijing's implementation of its Hong Kong security law. President Trump will be giving a news conference later today on the U.S. response to China's democracy-quashing move, which breaks the 50-year "one country, two systems" agreement China made with the UK in 1997. He is expected to revoke Hong Kong's "special status" (which will have far reaching implications on the territory's status a global financial hub) and outline sanctions, among other measures. Beijing is also upping the ante with its long-held desire to reunify Taiwan with the mainland, with the head of China's Taiwan Affairs Office warning today that attempts by foreign forces to interfere in China's reunification "will fail." EUR-USD is so far continuing 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.

    [USD, JPY]
    The yen has strengthened as risk-off sentiment took a grip, while the dollar, despite this backdrop, underperformed. USD-JPY fell nearly 0.5% in posting an 11-day low at 107.08. EUR-JPY ebbed by about 0.3%, retracing around a half of yesterday's rally in making a low at 118.88, which had produced a two-month high at 119.42. AUD-JPY also traded softer, though remained shy of its low from yesterday. In the stock market realm, S&P 500 futures are showing a near 0.5% loss, as of the early London AM session, while most Asia-Pacific markets have put in a sputtering price action. Concerns about the U.S.-China, and more broadly the West-China, stand-off are mounting following Beijing's implementation of its Hong Kong security law. President Trump will be giving a news conference later today on the U.S. response to China's democracy-quashing move, which breaks the 50-year "one country, two systems" agreement China made with the UK in 1997. He is expected to revoke Hong Kong's "special status" (which will have far reaching implications on the territory's status a global financial hub) and outline sanctions, among other measures. Meanwhile, a senior Chinese general spoke today of both "peaceful and military options" to resolve the "Taiwan problem," and the head of China's Taiwan Affairs Office warned that attempts by foreign forces to interfere in China's reunification "will fail." A raft of month-end date releases out of Japan had little impact. On the coronavirus front, a spike in confirmed infections in South Korea has led to a reintroduction of lockdown measures. Overall, we retain a bearish view of USD-JPY.

    [GBP, USD]
    The pound's current proclivity to correlate with stock markets has been on display over the last day, with Cable yesterday rallying concomitantly with global stock markets to posting a 15-day high at 1.2364. Only the Australian and New Zealand dollars outperformed the UK currency out of the main currencies. The causation of sterling's high-beta characteristic, which was seen during the 2008/9 financial crisis and again during current pandemic crisis, is a combo of the UK's open economy, large current account deficit, and relatively outsized financial sector, which renders the currency sensitive to risk-off phases, while on the flip side making it apt to outperform during the risk-back-on phases. Cable has consequently been on an roller coater, plunging in March, at the height of the market panic, by the most over a two-week period on record, which left a 35-five year low at 1.1409. The gain over the last day has pushed the pound back toward the lower reaches of a broad consolidation range that's been enduring since April. Research out of Lloyds bank in London suggests that, with the acute dislocations since in March now fading and markets regaining their posture, the pound's correlative link with global stock markets is weakening. Its Cross-Asset Risk Index has fallen from a positive correlation of 0.85, at the high, to 0.61 now. We continue to anticipate limit potential for a sustained recovery in sterling, which is presently trading at a near 7% year-to-date discount when averaged against the dollar, euro and yen. UK markets are discounting negative repo rate by year-end, while there remains a risk that the UK leaved its post-Brexit transition membership of the EU's single market (which includes 40 free trade agreements around the world) at year-end, which would put a large part of UK trade on much less favourable WTO terms.

    [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 in a consolidation of recent losses, which on Wednesday left an 11-week low at 1.3725. At the same time, oil prices have been consolidating recent gains, which has taken some of the wind out of the Canadian dollar's sails. The Canadian currency, likely other commodity currencies and risk assets, is also back to levels prevailing before the global market panic of mid March. This should give market participants pause for thought, as reopening economies are only doing so only partially, and there is a risk for a second wave of coronavirus infections as social and economic re-liberalization unfolds (witness the spike in cases in South Korea, which has led to a re-introduction of lockdown measures). As for oil prices, front-month WTI crude futures have tipped lower after pegging an 11-week high on Tuesday at $34.81. The outlook for oil is still bullish. OPEC+ adherence to planned production cuts is reportedly high, although Russia is desiring to increase output in July. U.S. output continues to fall amid the forced closure of hundreds of shale wells, with current pricing making such operations unviable. On the demand side, China and India are said to be increasing imports, while fuel use in general has been on the rise as economies emerge from lock down. Bigger picture, as long as the nascent recovery isn't scuttled by a second wave of COVID-19 infections, oil price risk going forward would appear to be to the upside.

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