XE Market Analysis: Europe - Jun 23, 2020

The news flow today caused a brief risk-off burst in Asia-Pacific markets followed by a sharp recovery. In currencies, this transpired as a bout of dollar and yen outperformance alongside a sharp drop in risk-sensitive currencies such as the Australian dollar, followed by a quick reversal. The cause was miscommunication from the White House. Trade adviser to President Trump, Pete Navarro, said during an interview with Fox that the trade deal with China was "over." This saw risk assets and currencies tumbling, before Navarro quickly walked-back his remarks with the help of White House Economic adviser Kudlow, who affirmed that the trade deal was very much in place. Trump himself then tweeted: "China Trade Deal is fully intact." The narrow trade-weighted USD index (DXY) dropped to a 96.89 low on the initial remarks by Navarro, which is the lowest level seen since June 17th, before sprinting to a 97.24 high and subsequently settling near 97.00. EUR-USD concurrently dropped by over 30 pips in making a low at 1.1244 before rebounding to levels around 1.1270. The pair earlier printed a six-day high at 1.1279. USD-JPY dipped from levels just under 107.00 to a low of 106.74, and then rallied to a six-day high at 107.22. AUD-USD dove from around 0.6925-30 to a 0.6859 low before fully recouping, and then settling around the 0.6900 mark. A one-week high was left at 0.6932. USD-CAD rallied to a peak at 1.3571 on the reaction to Navarro's initial remarks before returning to the lower 1.3500s on the White House walk back. Front-month WTI oil prices printed a fresh 16-week high at $41.23, subsequently dropping to a $40.27 low before rebounding back towards $41.00. Preliminary July PMI data out of Australian and Japan, which both showed unsurprising improvement, had little impact. In other news, SNB's Zurbruegg said that the central bank is not concerned about the possibility of Switzerland being tagged as a currency manipulator by the U.S. Japan warned the UK that only a limited post-Brexit trade deal is on the table, and gave the UK just six weeks to agree to it.

[EUR, USD]
EUR-USD dropped by over 30 pips in making a low at 1.1244 before rebounding to levels around 1.1270. The pair earlier printed a six-day high at 1.1279. The volatility was caused by a miscommunication from the White House, saying that the trade deal was off before walking this back. This caused a bout of dollar safe haven buying followed by bout of selling as these positions were unwound. In the bigger view, EUR-USD has 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). We anticipate only 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 economic normalcy, which likely won't be achieved until such time there is a vaccine or effective treatment for the SARS Cov-2 coronavirus, should keep the dollar prone to bouts of outperformance on safe haven demand, however. At the same time, should massive central bank stimulus make its way into risk assets, this could have a weakening impact on the U.S. currency.

[USD, JPY]
USD-JPY dipped from levels just under 107.00 to a low of 106.74, and then rallied to a six-day high at 107.22. The chop was caused by a miscommunication from the U.S. government, which said the trade deal was off before walking this back. In Japan, the preliminary June PMI surveys showed manufacturing dipping slightly, to 37.8 from 38.4, while the services reading rose substantially, to 42.3 from 26.5. The government's tax panel head said that next stimulus package will be targetting to provide an economic boost in the autumn. Global sentiment will likely remain the dominant driver of yen direction. 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 reopening and de-restriction. Geopolitical issues remain wildcards. President Trump, for instance, said last week that the U.S. could complete a "decoupling" from China, though its pretty clear that Trump values his trade deal with Beijing. 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 found its feet against the dollar and its other main peers this week following a two-week phase of underperformance, which was capped-off late last week by the BoE's expansion in QE, and signal for more if needed. The domestic focus this week is on the UK's preliminary June PMI surveys, due today, with BoE and Brexit news expected to be thin this week. The PMI data can be expected to show a further improvement from dismal April levels due to the continued social and economic reopening in the UK and globally. The headline preliminary composite PMI is expected to rise to 38.0 from May's reading of 30.0. This would continue the rebound from April's record low at 13.8, but still signal an economy deep in contraction. The UK government is expected to detail a further relaxation in lockdown rules tomorrow, which is expected to confirm the reopening of the hospitality industry on July 2 in the UK, along with a reduction in the 2 metre social distancing rule in England. This won't likely be a mover of the pound in the even the prime minister confirms this. The pound has been a correlate of global stock market direction during the coronacrisis era so far, and we expect this to remain the case, albeit with less strength than seen during the height of the market turmoil in March. Doubts about the potential scope of a trade deal between the UK and the EU, and concerns, too, about whether a deal will even be reached in time for the UK's year-end exit from its post-Brexit transitory membership of the single market, will continue to curtail the pound's upside.

[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 rallied to a peak at 1.3571 on the reaction to President Trump's trade advisor Navarro's remarks that the trade deal with China was off before returning to the lower 1.3500s on the White House walk back. Front-month WTI oil prices printed a fresh 16-week high at $41.23, subsequently dropping to a $40.27 low before rebounding back towards $41.00. Regarding oil prices, which has continued to be the principal driven of Canadian dollar direction, bullish momentum has been waning, despite the fresh highs. Markets have gone some way in pricing-in reopening global economies, and the associated demand stimulus things is bringing, although oil prices remain some 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.