XE Market Analysis: North America - Jun 19, 2020

The dollar has been trading mostly narrow ranges against most other currencies, though gained again the pound, which came under fresh pressure, extending a two-week phase of underperformance that the UK currency has been seeing. Cable printed an 18-day low at 1.2378, while EUR-GBP posted a three-week high at 0.9050, which is within 6 pips of 12-week high territory. There didn't appear to be a fresh selling catalyst, and a solid monthly rebound in UK May retail sales data -- hardly a surprise after the collapse in April -- was overlooked. Ongoing Brexit risk -- specifically the risk that the UK either ends up with either a bad trade deal, or no trade deal at all with the EU, when the UK's transitory membership of the EU's single market ends on December 31st -- has continued to take a toll. Elsewhere in the forex real, narrow ranges have been prevailing. The narrow trade-weighted USD index has been holding in a consolidation of recent gains just off yesterday's 15-day high at 97.58. EUR-USD has concurrently settled to a consolidation of recent losses, holding a narrow range in the lower 1.1200s, above the 16-day low seen yesterday at 1.1185. USD-JPY has been plying a narrow range in the upper 106.00s, holding above yesterday's one-week low at 106.67. Both AUD-USD and AUD-JPY have been posting narrow ranges well within the confines of their respective Thursday highs and lows. The Canadian dollar has posted modest gains, although USD-CAD remained within its previous-day range. Front-month WTI crude prices printed an 11-day peak at $40.28, underpinned by news that the OPEC+ group agreed to meet their supply cut quotas, along with major oil traders saying that demand is recovering, although both these items should already have been largely factored in.

[EUR, USD]
EUR-USD has settled to a consolidation of recent losses, holding a narrow range in the lower 1.1200s, above the 16-day low seen yesterday at 1.1185. The pair has been ebbing lower over the last couple of week, after 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 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. 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 has been plying a narrow range in the upper 106.00s, holding above yesterday's one-week low at 106.67. The BoJ remains committed to uber stimulus, though 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. Global sentiment will likely remain a dominant driver of yen direction. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence and repatriate funds when times are uncertain, the yen has build up a reputation as a safe haven currency. This is likely to remain a dominant driver of the currency. At the moment, uncertainty is prevailing in global markets, which has seen the yen rebound against the higher beta currencies, such as the Australian dollar, of late. Global market sentiment is 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 introduced in some places (such as Beijing and in California). Geopolitical issues remain wildcards. President Trump, for instance, said yesterday that the U.S. could complete a "decoupling" from China. On the "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]
The pound remains on a week footing, ebbing lower versus the euro today, though so far remaining above the three-week lows it saw against the common currency yesterday. Cable has drifted back toward yesterday's 18-day low at 1.2401, and the UK currency is set to complete a second consecutive week of declines against the dollar and euro, and other currencies. UK retail sales data, released ahead of the London interbank open, posted an above-consensus rebound in May, though to little market impact as this was the fully expected scenario, and with economic data largely playing second fiddle as markets look to social and economic reopening amid concerns about second waves of coronavirus infections. Sterling fell sharply yesterday, more than reversing an initial "on-the-fact" buy reaction to the BoE's policy announcement. The BoE's lack of mention on the possibility of negative interest rates had been the principal driver of the pound's post-announcement bounce, but the central bank still expanded QE by GBP 100 bln while pledging a further expansion if needed, and warned about the risks stemming from a second wave of infections in reopening developed economies, and the ongoing virus spread across developing-world countries. Another negative for the UK currency has been the decline in global stock markets this week, to which sterling has exhibited a strong positive correlation with in the pandemic era thus far. Concerns also remain on the EU-UK trade front, despite leaders having earlier in the week declared a new intensity in discussions. At issue is that the two sides look unlikely to be able to make a deep and comprehensive trade deal, and more likely an agreement comprising of limited arrangements, which will leave both sides worse off, or not deal at all, which would see the UK switch a large portion of its trade to less favourable WTO terms. In broad trade-weighted terms, the pound is trading at about a 11-12% discount relative to the average levels that were prevailing in the two years price to the vote to leave the EU in June 2016.

[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 this week, 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 has been holding steady in the mid-to-upper 1.3500s, holding within its Thursday range, as have man other dollar pairings thus far today. The Canadian dollar hasn't found much traction from front-month WTI crude prices printing a nine-day peak at $39.97, having been buoyed by news that the OPEC+ group agreed to meet their supply cut quotas, along with major oil traders saying that demand is recovering, although both these items should already have been largely factored in. The domestic calendar brings April retail sales today, which we expected to tumble by 15% on the month. April data has proved to be the nadir in most economic metrics in many economies, encompassing the full impact of the virus-containing lockdowns.