XE Market Analysis: North America - Jun 24, 2020

Most dollar pairings have been holding within their respective Tuesday ranges, while the New Zealand dollar fell by nearly 1% on dovish RBNZ policy guidance, and the pound managed to eke out a six-day high during the Asia-Pacific session before turning lower. EUR-USD recouped to around the 1.1300 level from the intraday low at 1.1270, leaving the pair well within yesterday's 1.1233-1.1350 range. The low in EUR-USD was a product of a bout of dollar buying as European equity markets and S&P 500 futures took a sharp turn lower. Surging coronavirus-related hospitalizations in the U.S and problematic workplace clusters of new infections in many reopening economies, along with trade tensions between the U.S. and Europe, are for now outweighing massive central bank liquidity provision and the anticipation of more fiscal relief measures. An above-forecast headline in the German Ifo index was overlooked. NZD-USD tipped to a low of 0.6423, which is a loss of over 100 pips from yesterday's 13-day day peak. The RBNZ left its official cash rate and QE program unchanged, as had been widely anticipated, but stressed a willingness to take further stimulus measures if necessary while noting persisting downside risks to the economy, adding that currency strength remains a negative for NZ exporters (the Kiwi is up by over 6% over the last month, versus the U.S. dollar, and by over 17% from March lows). The post-announcement market consensus seems to be shaping up as an expectation for the RBNZ to expand QE in August. Elsewhere, the narrow trade-weighted USD index (DXY) consolidated in a narrow range above the 13-day low seen yesterday at 96.39, unwinding a mid-European morning spike. USD-JPY posted a sub-30 pip range in the mid 106.00s. USD-CAD recouped above 1.3550 after pegging a 13-day low at 1.3484 yesterday. Front-month WTI oil price futures have settled below yesterday's three-month peak at $41.63. Weekly API data showed a U.S. crude inventory build of 1.75 mln barrels last week. Sterling came under modest pressure, though follow-through was lacking, and the three-week low seen against the euro yesterday was left unchallenged.

[EUR, USD]
EUR-USD recouped to around the 1.1300 level from the intraday low at 1.1270. The low was a product of dollar buying as European equity markets and S&P 500 futures took a sharp turn lower. Surging coronavirus-related hospitalizations in the U.S, problematic workplace clusters of new infections in many reopening economies, and trade tensions between the U.S. and Europe are for now outweighing massive central bank liquidity provision and the anticipation more fiscal relief measures. Markets are in a constant state of tweaking risk premia, which for for EUR-USD means downside pressure when the dollar gains on safe haven demand. The EU's proposed EUR 750 bln multiannual financial framework fund has continued to be taken as a positive step in analysts commentaries -- being a hinge factor of bullish euro calls at Morgan Stanley and Citi, for instance. Morgan Stanley analysts argued that the EU proposal means that some of the risk premium for EU break-up risk will abate, and that the creation of a new large and liquid, higher-yielding AAA asset will attract inflows from real money investors and reserve managers. The team at MS is forecasting EUR-USD at 1.2000 by Q2 next year. We take a slightly more circumspect view, at least over the nearer term, given the risks of setbacks on the road back to economic normalcy, which likely won't be achieved until such time there is a vaccine or effective treatment for the SARS Cov-2 coronavirus, which in turn should keep the dollar prone to bouts of outperformance. EUR-USD rotated lower since making a three-month high at 1.1423 on June 10th. The high marked an incursion 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).

[USD, JPY]
USD-JPY has been in tight range-bound mode again, seeing less that a 30-pip range in the mid 106.00s so far today. Most yen crosses have been similarly directionally challenged. The BoJ released its Summary of Opinions document from the June policy meeting, which was of limited interest to markets given that the minutes have long since been released. While the BoJ remains committed to uber stimulus, the central bank is no longer unique in this regard, and so has been having little weakening impact on the Japanese currency relative to peers. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the yen has built up a reputation as a safe haven currency. This is likely to remain a principal driver of the currency, especially against high beta currencies, such as the Australian dollar and other commodity-correlating currencies. Market participants are grappling with glass-half-empty and glass-half-full arguments. There are signs of new waves of coronavirus infections as economies reopen, which has already seen social restrictions being re-introduced in some places (such as Beijing and in California), although the overall trend remains to de-restriction. Geopolitical issues remain wildcards, although, on the U.S.-China front, its pretty clear that President Trump values his trade deal with Beijing five months out from the presidential election. On the glass "half full" side, there is the expectation that the massive stimulus by global central banks is primed to give risk assets a major boost, which in the event would likely see the Japanese currency underperform.

[GBP, USD]
Sterling has come under pressure since the London open, pressing lower against both the dollar and euro, among other currencies. Cable turned below 1.2500 after earlier posting a six-day high at 1.2542, while EUR-GBP printed an intraday high at 0.9057, drawing back in on yesterday's three-month peak at 0.9082. A combo of the upcoming EU recovery fund and the market perception that the BoE is unwinding monetary stimulus prematurely, has been giving EUR-GBP an underpinning of late. The brief rally that the pound stage following yesterday's much better than expected preliminary UK June PMI data was met by a wave of selling. The data, for one thing, compared to other well-above-forecast PMI readings in Europe. The BoE's raising of its QE program by GBP 100 bln last week, and statement that purchases would be complete by year-end, works out (adding the existing purchase schedule plus with the new 100 bln schedule) at a GBP 6.6 bln tapering in gilt purchases per week. Although this represents a tightening in monetary policy, markets are viewing it as sterling negative given the perceived risk to growth in the pandemic era. Also, BoE Governor Bailey indicated in a Bloomberg Opinion article on Monday that the QE total would be reduced before hiking interest rates, which marks a reversal of course from his predecessor, Carney. Overall, markets are taking this as the BoE giving forward guidance on unwinding stimulus, and viewing this in such febrile times, and with the Fed and ECB maintaining "will do what ever it takes" guidance, as being a negative for the currency, especially with the Brexit endgame remaining uncertain.

[USD, CHF]
EUR-CHF has fallen back over the last couple of weeks, 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 last week, 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. The SNB also trimmed inflation forecasts, 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 Swiss policymakers' central policy guidance.

[USD, CAD]
USD-CAD recouped above 1.3550 after pegging a 13-day low at 1.3484 yesterday. Front-month WTI oil price futures have settled below yesterday's three-month peak at $41.63. Weekly API data showed a U.S. crude inventory build of 1.75 mln barrels last week. Oil prices are likely to remain the principal driver of Canadian dollar direction. Bullish momentum in crude markets has been waning, despite the recent fresh highs. Markets have gone some way in pricing-in reopening global economies, and the associated demand stimulus things is bringing, although prices remain some way below pre-crisis levels (WTI benchmark prices averaged about $60 in the year to early March). Supply still remains tight, with the OPEC+ group maintaining reduced output quotas and with relatively cost intensive U.S. production continuing to slide. The weekly Baker-Hughes U.S. oil rig count on Friday revealed a 10 rig decrease, leaving the total at 189. This marked the 15th consecutive week of declines. For USD-CAD, we anticipate that the balance of risks remains to the downside, assuming that global economies are able to keep a lid on new coronavirus inflections until such time there is a vaccine or effective treatment of the SARS Cov-2 virus. This view also assumes that the OPEC+ group will maintain discipline over supply quotas.