XE Market Analysis: North America - Jun 22, 2020

The dollar dropped back after a short-lived pop higher at the open in Asia-Pacific trading today, inversely correlating with a 0.7%-plus rally in S&P 500 futures, which pointed to an opening gain on Wall Street that would more than reverse Friday's losses. The narrow trade-weighted USD index (DXY) saw a three-week high at 97.74 at the open before turning lower, to a 97.46 low. EUR-USD concurrently lifted out of a 19-day low at 1.1169. Sterling traded moderately firmer against the dollar and its other main peers, which follows a two-week phase of underperformance. USD-JPY held a 20-pip ranged in the upper 106.00s. The risk-sensitive currencies rebounded from early losses, as stocks in the Asia-Pacific region lifted out of early losses, for the most part, while S&P 500 futures rallied. AUD-USD printed a one-week low at 0.6805 before rebounding to an intraday high of 0.6994. The peak marked over a 0.7% gain on Friday's closing level, though the Aussie still remained shy of its Friday high at 0.6913. The Kiwi dollar rebounded out of a three-week low. USD-CAD pegged a one-week high at 1.3630 before retreating back under 1.3500. Front-month WTI crude prices consolidated recent gains, holding below the 16-week high that was seen on Friday at $40.49. The early wobble in markets at the open today came with data showing a further acceleration in coronavirus infections in some U.S. states, pushing total confirmed U.S. cases up to a rate of +1.6% versus the +1.2% seven-day average. German's coronavirus r-rate also increased to 2.88, though the Robert Koch Institute downplayed this, arguing that small localized outbreaks in the context of low overall case numbers have exaggerated the headline statistic, which helped risk sentiment improve in global markets. Bundesbank head Weidmann also said over the weekend that he thinks the worst of the economic trough in Germany has passed, while the Italian government is reported to be near to approving a bailout of Fiat Chrysler. The UK government, meanwhile, is expected to ease coronavirus lockdown restrictions further tomorrow.

[EUR, USD]
EUR-USD has lifted out of a 19-day low at 1.1169, which was seen at the open in the Asia-Pacific session amid a bout of risk-off positioning, which proved to be short lived. The early wobble came with data showing a further acceleration in coronavirus infections in some U.S. states, pushing total confirmed U.S. cases up to a rate of +1.6% versus the +1.2% seven-day average. German's coronavirus r-rate also increased to 2.88, though the Robert Koch Institute downplayed this, arguing that small localized outbreaks in the context of low overall case numbers have exaggerated the headline statistic, which helped risk sentiment improve in global markets. Bundesbank head Weidmann also said over the weekend that he thinks the worst of the economic trough in Germany has passed, while the Italian government is reported to be near to approving a bailout of Fiat Chrysler. EUR-USD has been ebbing 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 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 weak 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 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 pegged a one-week high at 1.3630 before ebbing back under 1.3500. Front-month WTI crude prices have been consolidating recent gains, holding below the 16-week high that was seen on Friday at $40.49. Regarding oil prices, which has continued to be the principal driven of Canadian dollar direction, bullish momentum has been waning, with markets having 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 don't discipline over supply quotas too early in the recovery.