XE Market Analysis: North America - May 05, 2020

The dollar and yen rose against most currencies during the European morning, correcting some of the losses seen against the commodity currencies during the Asia-Pacific session. The two currencies, which broke the recent correlative pattern by rising despite a backdrop of buoyant global stock markets, were main benefactors of broad euro weakness. EUR-USD dropped to a six-day low at 1.0926, and EUR-JPY to 115.60, also a six-day nadir. This came after Germany's constitutional court gave the ECB three months to tweak the public sector purchase program and thus the central bank's extensive QE measures (ruling that some of the measures the Bundesbank is taking under the ECB's Public Sector Purchase Program are not covered by EU law). Elsewhere, the Canadian dollar and other oil-correlating currencies strengthened on the back of a rise crude prices. USD-CAD dropped below Monday's low in making a low at 1.4029, with the Canadian dollar advancing for the first time since last Wednesday. June WTI crude futures rose by over 10% in pegging a three-week high at $22.77. Goldman Sachs research raised its 2021 oil price forecast to $51. There is now a large body of analysts anticipating a rebound in oil prices, partly on the view that depleting storage capacity is forcing producers into sizeable output cuts. AUD-USD lifted above its Monday high in making a peak at 0.6462. The RBA left its cash rate unchanged at 0.25%, as had been widely anticipated, while loosening the minimum criteria for purchases of corporate debt under its QE program, which will now include debt rated to BBB-. Weekly jobs data out of Australian was down 7.5%. New Zealand reported no new coronavirus cases for a second day, reaffirming the success both New Zealand and Australian have had in containing the virus, which has prompted talk of a free travel policy between the two nations.

[EUR, USD]
EUR-USD has ebbed below its Friday lows in reaching a 1.0923 nadir, retracing some of the gains seen from the April-24th low at 1.0726. Recent gains had been fuelled by a rotation lower in the dollar, which had been concomitant with a risk-on vibe in global markets, underpinned by the sift to reopening from lockdowns in many economies. Increasing tensions between the U.S. and China, with the former blaming the coronavirus pandemic on the latter, and threatening to take measures, including fresh tariffs, have fostered a new phase of risk aversion in global markets, which in turn is now underpinning the dollar against most other currencies, including the euro. EUR-USD remains to the south of the halfway mark of the volatile range that was seen during the height of 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. Both the ECB and the Fed are pursuing aggressive easing policies, both Europe and the U.S. are facing significant economic headwinds from virus-containing lockdown measures, and both Europe and the U.S. are now pursing economic reopeing strategies.

[USD, JPY]
USD-JPY has remained heavy, but above Friday's 106.60 low and, in turn, the seven-week low seen last Wednesday at 106.36. The yen, meanwhile, has been trading firmer against the euro, commodity currencies, and most other currencies today, against a risk-off backdrop. Trading conditions have been thin with both Japan and China amid a week-long holiday period. We expect the Japanese currency to remain in the outperforming list with risk aversion taking a grip again amid a combo of weak economic data and, more particularly, the Trump administration's ratcheting up of its accusations about China and the coronavirus pandemic. U.S. Secretary of State Pompeo said on Sunday that there was a "significant amount of evidence" that the virus emerged from a lab in Wuhan. Beijing, via an editorial in the state-controlled Global Times responded by saying that the U.S. was "bluffing." Reports last week suggested that the White House is considering taking a number of measures against China, including new tariffs. It should be obvious that Trump motives for blaming China are high six-months out from a presidential election, though the fraying relations between the two biggest economies is a real concern for investors.

[GBP, USD]
Sterling is trading mixed, dropping against a generally firmer dollar while gaining versus an underperforming euro, while holding steady against the yen. Cable posted an intraday low at 1.2421 after tumbling back from the intraday high at 1.2461. In contrast, euro weakness drove EUR-GBP over 0.5% lower, to a four-day low at 0.8708. The release of final UK PMI survey data out was of no consequence. Despite the final composite PMI being unexpectedly revised higher, to a reading of 13.8 from the preliminary estimate of 12.9, this is of course not something to be greeted with joy as the revised outcome still marks -- by far -- a record low since the series started in 1998, having plunged from 36.0 in March and from a reading above 50.0 in February. The BoE's May Monetary Policy Committee meeting is up this week (announcing Thursday), which will be accompanied by its quarterly Inflation Report. The central bank has already slashed its policy repo interest rate to near zero while expanding its QE programme and putting in liquidity measures in response to the financial market consequences of the pandemic-forced economic lockdown. As with the Fed and ECB last week, this policy meeting isn't likely to be too eventful, with the policy framework expected to be left unchanged for now. Large reductions in the central bank's growth and inflation forecasts can taken as a given in the Inflation Report. The UK's lockdown is set to last through to Thursday, when the government will make a second review. Although the five criteria the government has listed as necessary to be met before a phased reopening can commence (flattening in the infection rate, ability of the health system to cope, increased diagnostic testing capacity etc) look to be nearing accomplishment, Prime Minister Johnson will reportedly extend the lockdown for a third time, although for how long is uncertain. He will also, reportedly, detail a roadmap to economic reopening in the UK.

[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 below Monday's low in making a low at 1.4029, with the Canadian dollar advancing for the first time since last Wednesday. The Canadian currency, along with other oil-correlating units benefited by June WTI crude futures rising 8% in pegging a three-week high at $22.09. Goldman Sachs research raised its 2021 oil price forecast to $51. Oil prices remain down by over two thirds from the highs seen in early January, marking a significant deterioration in Canada's terms of trade. The near 9% year-to-date weakening in the Canadian dollar versus the U.S. dollar, along with the near 6% decline against the euro and near 10% drop versus the yen, reflects the pricing-in of this reality in currency markets. Going forward, focus is on economies that are reopening from virus-containing lockdowns, and how successful, extensive and durable this proves to be. This should rekindle demand for oil and other commodities, which should in turn put in an underpinning for the Canada's currency.