XE Market Analysis: North America - Jun 18, 2020

The dollar has been mostly steady, though lost modest ground to the yen, which found a moderate safe haven bid during the Tokyo session, while gaining ground against the pound during the London morning, into the BoE policy announcement. The UK currency racked up losses of over 0.4% against the dollar and euro, and most other peers, with Cable printing a three-day low at 1.2499 and EUR-GBP lifting into three-day high terrain above 0.9000. While the BoE is widely expected to leave policy unchanged today, there is speculation that that it may hint at negative interest rates farther down the road. The Norges Bank and SNB left policy unchanged at their respective policy reviews today, with the latter reaffirming that currency intervention will remain its principal tool to limit franc appreciation. In Asia, the Taiwan central bank also left policy unchanged, while the PBoC cut its 14-day reverse repo rate. Elsewhere in the currency realm, EUR-USD held comfortably within its Wednesday range so far today, centering around 1.1250, while EUR-JPY dipped to a 16-day low amid a bout of yen safe-haven demand as global markets struggle amid lofty valuations and signs of second-wave coronavirus infections as economies reopen. USD-JPY printed a six-day low at 106.70, while the risk-sensitive AUD-JPY cross posted a three-day low. USD-CAD lifted to a two-day high at 1.3608, before ebbing back, which extended a rebound from Tuesday's one-week low at 1.3502. The Canadian currency continued to correlate with oil prices, with front-month WTI crude futures printing a two-day low at $37.12 before recouping back above $38.0. Market attention will now turn to the latest weekly U.S. jobless claims report, with the high frequency data from the world's biggest economy remaining a major focal point. We expect ongoing moderation after 10 weeks of declines, forecasting a 1,200k level of initial claims for the week ended June 13th, down from 1,542k in the June-6th week.

[EUR, USD]
EUR-USD has held comfortably within its Wednesday range so far today, centering around 1.1250, while EUR-JPY dipped to a 16-day low amid a bout of yen safe-haven demand as global markets struggle amid lofty valuations and signs of second-wave coronavirus infections as economies reopen. Market attention will today turn to the latest weekly U.S. jobless claims report, with the high frequency data of the world's biggest economy remaining a major focal point for markets. We expect ongoing moderation after 10 week of declines, forecasting a 1,200k level of initial claims for the week ended June 13th, down from 1,542k in the June-6th week. As-expected data would not likely have much bearing on the dollar. For EUR-USD, which has been trading toward the one-year highs that were seen in early March (near 1.1500), having recovered from the March low at 1.0637 (the lowest level seen since April 2017), we anticipate limited sustained directional bias in the months ahead, with little divergence seen in either Eurozone versus U.S. growth paths nor ECB versus Fed policies and yield differentials. The risk of setbacks on the road back to normalcy, which likely won't be achieved until such time there is a vaccine or effective treatment of the coronavirus, should keep the dollar prone to bouts of outperformance on safe haven demand, however.

[USD, JPY]
Moderate yen outperformance has weighed on USD-JPY, which posted a six-day low at 106.70, while EUR-JPY hit a 16-day low and the risk-sensitive AUD-JPY cross a three-day low. This was a consequence of a moderate safe haven bid for the Japanese currency as global equity markets continued a sputtering price action. A tussle between glass-half-full and glass-half-empty viewpoints continues to play out in global markets. In question is the scope for richly valued asset prices to sustain amid signs that reopening economies are causing a second-wave of coronavirus infections, with the surge in new cases in several U.S. states being a case in point, along with Beijing taking lockdown measures to contain an outbreak in the capital of the country that many thought had beaten the virus. Then there is the reality of changed social and consumer behaviour across global economies, and still-fractured supply chains, which are likely to ensure that the road back to economic normalcy is a long one, and won't likely be fully realized until such time there is vaccine and/or effective treatment of the SARS Cov-2 virus. Amid this backdrop, attention will turn to the latest weekly U.S. jobless claims report today, with the high frequency data of the world's biggest economy remaining a major focal point for markets. We expect ongoing moderation after 10 week of declines, forecasting a 1,200k level of initial claims for the week ended June 13th, down from 1,542k in the June-6th week.

[GBP, USD]
Sterling has taken a rotation lower into the BoE announcement, with the currency racking up losses of over 0.4% against the dollar and euro, and most other peers. Cable has printed a fresh three-day low at 1.2499 while EUR-GBP has lifted into three-day high terrain above 0.9000. The UK currency had been bid earlier in the week after a top-level videoconference on EU-UK trade injected fresh intensity into the negotiations, though market participants are now turning their attention to the BoE policy, with the Monetary Policy Committee announcing later today following a two-day meeting. The BoE's policy review comes with UK May CPI having ebbed to a rate of just 0.5% y/y, a four-year low and extending a disinflation trend after 0.8% y/y in April. The data will have been well anticipated by policymakers, which have already implemented crisis response measures as a consequence of the coronavirus pandemic. The central bank is likely to keep its powder dry and leave policy settings unchanged at its announcement tomorrow, but will accompany this with unambiguously dovish guidance, including, we suspect, keeping open the possibility of negative interest rates. The possibility of going negative with interest rates is pressuring the pound, along with the backdrop of flagging global stock markets, to which the UK currency has established a strong positive correlation with during the pandemic era so far.

[USD, CHF]
EUR-CHF has fallen back over the last week, though has continued to trade comfortably above the series of lows near 1.0500 that were seen from March through to mid May. Committed SNB intervention prevented the 1.0500 level from being breached over this period, when the consequences of the pandemic increasing bets about a possible breakup of the euro area, and even the EU. However, since the Franco-German backed EU recovery fund gained traction in mid May, these bets have gone sour, which led to a rebound in EUR-CHF. The recovery fund is up for ratification at current EU summit, which concludes tomorrow. Assuming this passes, as looks likely (though its form still remains unclear), this should keep EUR-CHF supported for a while. Further out, the Swiss economy will likely be better able to recover from the pandemic era than the eurozone economy. Along with Swtizerland's massive current account surplus, these are factors that suggest upside potential for EUR-CHF will be limited, regardless of the SNB's desire for weaker franc. Regarding the SNB, the central bank left policy settings unchanged at its quarterly review today while reaffirming that aggressive intervention will remain the main tool to fight the impact of the coronavirus pandemic on the franc. SNB chief Jordan stressed that the currency remains "highly valued" and repeated that the central bank will continue to sell it as needed. The SNB is now forecasting a contraction in economic activity of 6% this year, the most severe recession since the 1970. Inflation forecasts were also cut, though it is pretty clear that policymakers are reluctant to go below the current level of -0.75% for the key policy rate. Negative for longer remained the central policy guidance.

[USD, CAD]
USD-CAD lifted to a two-day high at 1.3608, before ebbing back, which extended a rebound from Tuesday's one-week low at 1.3502. The move reflected weakness in the Canadian currency, which correlated with front-month WTI oil futures printing a two-day low at $37.12. The price action in crude has continued a broad consolidation phase after the benchmark crude price posted a three-month-plus high at $40.40 earlier in the month, which crude markets having have an equilibrium after surging out of the mid-April lows (when prices went briefly negative). Weekly U.S. inventory data showed crude stockpiles to have increased over the latest reporting week, while there are concerns about the scope for a full economic recovery until such time there is a vaccine or effective treatment for the coronavirus. We anticipate USD-CAD trading with little clear directional bias over the period ahead.