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XE Market Analysis: North America - Mar 30, 2021

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The dollar rallied to a near five-month high on the measure of the narrow trade-weighted DXY index. The high is 93.17, with the DXY rising above 93.0 today for the first time since the first week of last November. The dollar's gains was concomitant with a vault higher in mid- to longer-dated Treasury yields, with the 10-year note yield rising over 5 bp from yesterday in testing the 1.770% level for the first time since January 2020. The yield had been foraying under 1.60% just last Thursday. At the same time, yield differentials have widened more in the dollar's favour, with the 10-year T-note over Bund spread, for instance, stretching out to new 14-month highs over 203 bp. A marked yield differential widening has also been seen in the case of the T-note versus JGB yield, while the cases for U.S. versus UK and Australian 10-year yields have seen much less, if any, widening. This yield dynamic has been playing out against a backdrop of overall positive risk appetite. Both the pan-Europe Stoxx 600 and MSCI Asia-Pacific stock indices rallied over 0.5%, and U.S. index futures were showing modest gains heading into the Wall Street open. Weakness in Nomura shares was a drag on Japan's Nikkei 225, which underperformed most regional peer indices today. Nomura along with and Credit Suisse have been hit hard by the Archegos Capital default, and both banks are facing regulatory scrutiny. Investors are wary about who else might be exposed, though contagion has been limited and the overall tone across global equity markets has been positive. The global rollout of Covid vaccines remains a central focus for markets, especially with cases spiking again in Brazil and some other Latin American countries, in addiction to continental Europe. The Philippines in Asia is also seeing a sharp spike in new cases. Vaccination supply capacity is ramping higher, however, and given the evident success of the vaccination programs in the U.S., UK and Israel, where the rollout has been expensive compared to most other countries, we anticipate the reflation trade to fully recommence after the passing of month- and quarter-end, and the end of the financial year in the case of Japan. This should be bullish for the dollar and dollar bloc and other cyclical currencies, and bearish for the euro and yen.

[EUR, USD]
EUR-USD posted a five-month low at 1.1732, in what is now the seventh down day out of the last nine trading days. This is also the fifth out of the last six week's of descent, and the third consecutive month that the pair has headed lower. On the year so far, the dollar is registering as the second strongest of the main currencies, with only the oil-correlating Canadian dollar stronger, while the euro is the third weakest on the list, with only the yen and Swiss franc showing a bigger degree of underperformance. Yield differentials have been widening in the dollar's favour, with the 10-year T-note over Bund spread today stretching out to new 14-month highs over 203 bp. An above forecast reading of the March Eurozone ESI economic confidence survey, alongside perky March state inflation data out of Germany, has had little bearing on the euro. ECB's de Cos yesterday stressed that there is an ongoing need for monetary accommodation, remarks which won't surprise anyone but a reaffirmation of the central bank's commitment to ultra accommodative policy nonetheless. The ECB earlier in the month surprised markets by announcing a ramp up in its asset purchase program in an effort to dampen rising yields. Markets are focusing on the outlook for 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 fiscal stimulus along with the more advanced vaccination rollout in the U.S., which is facilitating societal reopening. Eurozone interest rates are near the most negative in the world (Swiss rates being the exception), and there is little prospect for the ECB to tighten policy on the horizon, contrasting to the debate surrounding the Fed, and the possibility it may be forced to tighten sooner than expected given the regime change in U.S. economic policy.

[USD, JPY]
USD-JPY rallied above 110.0 for the first time since March 2020, printing a high at 110.31. A fresh spike in U.S. Treasury yields drove dollar buying, especially in the case against the yen given the rootedness of JGB yields under the BoJ's yield curve control policy. More pronounced yen weakness looks likely on the the proviso that the global reflation trade continues, which we anticipate.

[GBP, USD]
We expect the pound to remain on a firming track against the euro and yen, but to struggle more in the cases against the dollar and cyclical currencies, such as the dollar bloc units. Incoming BoE policymaker remarks have been reflecting on the overall brightening outlook for the UK economy. Monetary Policy Committee member Saunders last Friday that unemployment is not likely to show the extent of rise that was forecast by the central bank in February, and BoE Chief Economist Haldane said that he expects a "rip-roaring" recovery, with consumers chomping at the bit to spend lockdown savings. These comments followed last week's release of preliminary March PMI survey data that smashed expectations, finding businesses reporting an increase in consumer demand in anticipation of societal reopening was already under way. The UK vaccination status, alongside the rate of Covid infection and mortalities, remain highly encouraging. 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. The evidence so far suggests that existing vaccinations will still have significant efficacy against new variants, including the Brazilian version, which is the most worrisome of know variants. The UK data calendar this week still has the third estimate on Q4 GDP (Wednesday) and final March PMI data (Thursday). The lending and GDP are too backward looking to have much impact, while the final PMI release won't likely differ from the preliminary report, which encompassed 85% of respondents feedback.

[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 has remained underpinned, though off from yesterday's five-day high at 1.2630. A spike in U.S. Treasury yields lent the U.S. dollar buoyancy, offsetting the impact of yesterday's rally in oil prices, which scaled 12-day highs on news of the unblocking of the Suez Canal. Note that only 5% of global oil supply passes through the canal, so the impact of the incident on crude markets, and in turn the oil correlating currencies, hasn't been dramatic. We see oil prices as having entered a broad consolidation phase after rallying strongly from the nadir seen in March-April 2020. Strident lockdown measures across continental Europe has been weighing on oil prices lately, though markets are expecting the OPEC+ group to refrain from loosening supply restraints in May, and instead maintain prevailing quotas. The group will be meeting later this week to decide on its May production levels. U.S. shale production has been increasing, though not significantly.

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