XE Market Analysis: Europe - Mar 24, 2021

The DXY dollar index rallied to four-month highs above 92.55 amid a backdrop of continued sputtering across global stock markets. The MSCI Asia-Pacific equity index touched two-week lows. U.S. Treasuries continued to find a safe haven bid, which pushed the 10-year yield under 1.60%, albeit briefly. Base metal prices remained mostly under pressure, although some managed to find a footing after declining sharply yesterday. Oil prices also found a toehold after plunging yesterday. The former exuberance about the vaccine rollout in major economies and the path to reopening has been replaced by a more circumspect sentiment in markets, with lockdown measures being re-introduced on continental Europe due to a surge in new cases that's been dominated by the B117 variant of SARS Cov2 (aka the UK variant). There are also concerns about the emergence of new variants that will render existing vaccinations obsolete, or at least less effective, which is the reason behind the UK government's draconian decision to make it illegal for its citizens to take foreign holidays in the months ahead. Among currencies, dollar firmness drove EUR-USD to a four-month low at 1.1800. Cable fell to a seven-week low at 1.3474, assisted lower by the release of much softer than expected inflation data out of the UK, where headline CPI fell to just 0.4% y/y in February. The pound also posted declines against the euro and yen, among other currencies. The dollar block currencies lost ground to the dollar and yen. AUD-USD clocked a seven-week low, while USD-CAD logged a two-week high. The yen remained steady against the dollar while posting gains versus other currencies, underpinned by safe haven demand. Japanese investors have reportedly been burnt by the rout in the Turkish lira, which has remained under pressure, although above the nadir seen on Monday.

[EUR, USD]
We remain bearish on EUR-USD. The ECB this month surprised markets by announcing a ramp up in its asset purchase program in an effort to dampen rising yields. Markets are also focusing on growth and yield differentials, and the U.S. economy is widely seen outpacing the Eurozone and other peers this year, thanks in large part to the massive upcoming fiscal spending spree. Eurozone interest rates are near the most negative in the world (barring Swiss rates), and there is little expectation for the ECB to tighten policy, contrasting to the debate about the Fed, and the possibility it may be forced to tighten sooner than expected.

[USD, JPY]
The yen has lifted in recent days amid the narrowing in the U.S. over Japan yield differential (amid a correction in U.S. yields), alongside a backdrop of sputtering global stock markets. The BoJ last week widened the target band under its yield curve control policy and removed explicit targeting on ETF purchases, giving the central bank room to draw in stimulus. We continue to expect that the yen will retain an overall softening bias, with JGB yields to remained relatively rooted to U.S. Treasury and other sovereign yields. The Japanese currency is registering as the weakest of the main currencies on the year so far because of this.

[GBP, USD]
Cable fell to a seven-week low at 1.3474, assisted lower by the release of much softer than expected inflation data out of the UK, where headline CPI fell to just 0.4% y/y in February. The pound also posted declines against the euro and yen, among other currencies. There are concerns about the emergence of new variants that will render existing vaccinations obsolete, or at least less effective, which is the reason behind the UK government's draconian decision to make it illegal for its citizens to take foreign holidays in the months ahead.

[USD, CHF]
Policymakers at the SNB retain a chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

[USD, CAD]
USD-CAD posted a two-week high at 1.2609, extending the rally out of the 37-month low that was seen last week at 1.2363. The dollar's yield differential advantage narrowed somewhat from levels seen last week, while oil prices have been amid the biggest correction in over five months, which has been weighing on the Canadian dollar and other oil correlating currencies. We expect oil prices to remain soft, given the demand destruction being caused by the re-implementation of lockdown measures across much of Europe. We had been noting waning upside momentum in the the bullish oil price trend, with prices having become quite lofty, having long since been re-established to pre-pandemic level norms, while global demand has continued to lag behind pre-Covid levels. The OPEC+ group have maintained tight quotas through to April, though the discipline is looking increasingly likely to falter, with Russia in particular chomping at the bit to increase supply. U.S. shale production will also continue to ramp higher, despite some hindrances imposed by the Biden administration.