XE Market Analysis: Europe - Apr 06, 2021

The dollar has found its feet after taking a tumble in thin markets yesterday. The bullish case for the dollar remains strong, given the outsized fiscal stimulus coursing through the U.S. economy alongside the relatively advanced states of Covid vaccination progress in the U.S. and likelihood for further widening in the U.S. Treasury yield differential versus peers. The March jobs report was a blowout, while the ISM services index surged to a record peak. Wall Street also scaled to new record highs yesterday. The only blot on the bullish dollar landscape is the uber accommodative stance of the Fed, which has been downplaying the scope for runaway inflation risks, although the relatively the high Treasury yields, among low- and sub-zero yielding peers, will offset this. The DXY dollar index has lifted to the upper 92.0s after yesterday posting a 12-day low at 92.52. EUR-USD has concurrently tested the waters below 1.1800 after making a 12-day peak at 1.1820. USD-JPY has lifted back above 110.00. AUD-USD has dropped back from one-week highs, while Cable has tipped back under 1.3900 after earlier pegging an 18-day high at 1.3920. The pound yesterday printed a 14-month high versus the euro, which although occurring in holiday-thinned trading reflects the contrasting fortunes of the reopening UK economy with the re-restricted economies across the Channel. The rate of new Covid cases now 4% of what it was at the peak seen in early January, despite a more than doubling in testing over that time, while the death rate is less than 3% of what it was at the highs. In data today, Chinese services PMI came in the strong side, at three-month highs, as did China's composite PMI reading. Beijing has made clear that it will be trimming lending, which has caused some investor indigestion, though it reflects policymakers' confidence in the outlook. The RBA left policy settings unchanged following its April policy review while pledging ongoing accommodation. The central bank still cautioned about the side-effect of its policy fuelling a potential house price bubble.

[EUR, USD]
EUR-USD tested the waters below 1.1800 after making a 12-day peak at 1.1820. We remain bearish of the pairing. Yield differentials are likely to remain tilted in the dollar's favour. ECB policy remarks have of late stressed that there is an ongoing need for monetary accommodation, remarks which won't surprise anyone but nonetheless 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 spending spree along with the more advanced vaccination rollout in the U.S. This comes with Eurozone interest rates being 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 about 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 lifted back above 110.00. The rootedness of JGB yields in a world of rising yields, as part of the global reflation trade, should continue to make for yen underperformance and keep USD-JPY pointed towards the upside.

[GBP, USD]
Cable tipped back under 1.3900 after earlier pegging an 18-day high at 1.3920. The pound yesterday printed a 14-month high versus the euro, which although occurring in holiday-thinned trading reflects the contrasting fortunes of the reopening UK economy with the re-restricted economies across the Channel. The rate of new Covid cases now 4% of what it was at the peak seen in early January, despite a more than doubling in testing over that time, while the death rate is less than 3% of what it was at the highs. A 10-year high in the final March manufacturing PMI (data released last Thursday) was an endorsement of sorts for Brexit, being achieved despite the increased trade friction that has been caused between the UK and EU as a consequence of Brexit. The two sides last week reached a post-Brexit Memorandum of Understanding (MOU) on financial regulation, which had been widely anticipated. The MOU will help to lay out a framework for cooperation on regulations and a forum for discussing rules, procedures, and information sharing. The UK data calendar this week is quiet. The main highlight will be the final releases of the March services and construction PMI surveys (due Wednesday and Thursday, respectively). Market participants will be factoring upside risk following the unexpected upward revision of the final manufacturing PMI report, which came in at a 10-year-plus high of 58.9 in the headline reading. The median forecast for the final services PMI is 56.8, and 56.6 for the composite reading.

[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 lifted to a rebound high at 1.2555 after yesterday posting a two-week low at 1.2499. The low was a product of a board pull back in the U.S. dollar. The Canadian dollar, alongside the pound, is registering as the strongest of the main currencies we keep tabs on on the year so far, with a gain of 8.5% against the weakest over this period, which is the Japanese yen (as of the early London session today). The loonie's outperformance has correlated with the surge in oil prices, which are still showing gains of over 23% despite the recent correction from two-and-a-half year highs. The Canadian dollar, being an oil correlating currency, has been a prime gainer of the reflation trade. The rootedness of JGB yields in a world of rising yields, meanwhile, has continued to make for yen underperformance, making a long in CAD-JPY an ideal currency position for the times.