XE Market Analysis: North America - May 27, 2020

The dollar dropped back as risk appetite picked up on news that Japan and the EU are moving closer to finalizing massive recovery funds, along with hopes for extra ECB stimulus. The narrow trade-weighted USD index has tumbled back under 99.00 and printed a 24-day low at 98.72. The euro rose against most currencies, while holding its own versus the outperforming commodity currencies, underpinned by news that the European Commission is reportedly outlining a compromise proposal that aims to satisfy both the German-Franco position and that the so-called "frugal four" (Austria, Sweden, Denmark and the Netherlands). EUR-USD broke above 1.1000, posting a high so far at 1.1030, which is the loftiest level seen since April 1st. A low was left at 1.0935. Amid this, the yen took a rotation lower as stock markets in Europe rallied after a sputtering Asia-Pacific session (when U.S.-China tensions weighed). S&P 500 futures were showing a gain of 1.3%, as of the early PM session in Europe, more than doubling the gain seen by the cash index yesterday on Wall Street. USD-JPY rallied to a 107.74 peak, gaining from the intraday at 107.36, which marked a nine-day nadir. USD-CAD dropped to an 11-week low at 1.3735, partly on broader U.S. dollar weakness and partly on an outperformance among the commodity currencies. Front-month WTI oil futures are modestly softer today after yesterday hitting an 11-week high at $34.81. The IEA said that the pandemic crisis is causing the biggest fall in global energy investment in history. The biggest gainer so far today out of the main dollar pairings and cross rates was AUD-JPY, which rallied by over 0.7%.

[EUR, USD]
The euro has lifted on EU recovery fund news, with the European Commission reportedly outlining a compromise proposal that aims to satisfy both the German-Franco position and that the so-called "frugal four" (Austria, Sweden, Denmark and the Netherlands). This has helped give European stock markets a boost, which in turn has led to the dollar losing some of its safe haven premium, in turn giving EUR-USD a further underpinning. S&P 500 futures are showing a gain of 1.3%, more than doubling the gain seen by the cash index yesterday on Wall Street. EUR-USD has rallied and broken above 1.1000, posting a high so far at 1.1030, which is the loftiest level seen since April 1st. A low was left at 1.0935. The euro is up against other currencies, too, showing respective 0.3% and 0.5% advances versus the pound and yen, for instance. At the same time, the narrow trade-weighted USD index has tumbled back under 99.00 and is threatening the 24-day low that was seen yesterday at 98.90. 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. Despite the fresh highs today, we still 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]
The yen has taken a rotation lower as stock markets in Europe rallied, after a sputtering Asia-Pacific session (due to U.S.-China tensions). S&P 500 futures were showing a gain of 1.3%, as of the early PM session in Europe, more than doubling the gain seen by the cash index yesterday on Wall Street. News that the European Commission is working on a compromise EU recovery fund injected some positive sentiment into markets. This in turn has led markets to ratchet back the Japanese currency's safe haven premium. USD-JPY consequently rallied to a 107.74 peak, gaining from the intraday at 107.36, which marked a nine-day nadir. Bigger picture, we retain an overall bearish view of the pairing, with both the coronavirus pandemic and Hong Kong issue escalating U.S.-China, and more broadly West-China, relations. There is also a risk that markets are over-anticipating the scope for a full recovery from reopening economies, especially given the possibility for a second-wave of infections. This could return demand of the yen as a safe haven. Regarding Hong Kong, while pro-democracy protests continued in Hong Kong's central business district, reports came in that Beijing has expanded the scope of its Hong Kong security law to cover organisations as well as individuals. It will go before the Chinese parliament this week where it's expected to be ratified into law. The U.S. has threatened counter measures if the law comes into effect, and the EU has signalled it will be giving a "robust" message to China on the issue.

[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 traded a narrow range in the upper 1.37s, above yesterday's 10-week low at 1.3755. The oil-correlating currency has been tracking the ebb-and-flow of crude markets. Front-month WTI oil prices are softer today after yesterday hitting an 11-week high at $34.81. The IEA said that the pandemic crisis is causing the biggest fall in global energy investment in history. 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.