XE Market Analysis: North America - Apr 07, 2021

The dollar has posted fresh lows, which put the DXY index at a 15-day low at 92.20. EUR-USD has printed a 15-day high at 1.1895. The biggest gainer out of the main dollar pairings and cross rates is EUR-AUD, which is showing a 0.6% gain on the day, printing a two-week high. Currencies are being influenced by the prevailing caution in global stock and commodity markets, which has seen cyclical, commodtiy-correlating currencies weaken, along with the dollar amid declining Treasury yields, while recent underperformers, such as the euro and yen, have staged rebounds. This comes with Eurodollar futures having indicated, as of yesterday, market expectations for the Fed to starting hiking interest rates before the end of 2022, with four quarter-point hikes priced in by early 2024 (contrasting sharply with the guidance that the Fed itself has issued, which has signalled unchanged rates through to 2024 under its new, more inflation tolerant policy rubric). The drop in Treasury yields in today suggest that the Fed tightening view may be coming under some revision. At the same time, investors are digesting prospects for higher corporate taxes linked to President Biden's $2 bln infrastructure plan, which analysts at GS reckon would trim 9% of earnings per share for companies listed in the S&P 500. The net impact has been a weakening in the inflation trade. The yen has turned from underperformer to outperformer, with. USD-JPY dropping to a nine-day low at 109.58, setting up what could be the pair's second down week out of the last six. Other notable movers have been a gain in EUR-CAD and a decline in CAD-JPY. The Canadian dollar, which has been amongst the strongest currencies on the year so far (being a principal winner in the reflation trade due to its correlation with oil prices), had been looking due for a correction, with the oil price rally having lost traction in recent weeks. This lifted USD-CAD to eight-day highs above 1.2600, despite the prevailing broader weakness in the greenback. The pound has also found itself in the underperforming lane, with EUR-GBP, most notably, having rebounded quite sharply after the cross printed a 14-month low on Monday.

[EUR, USD]
EUR-USD has remained buoyed by a generally softer dollar, while the euro itself has been seeing notable rebound gains versus the dollar bloc currencies, in addition to gains versus the yen and pound. EUR-USD has printed a 15-day high at 1.1895. The biggest gainer out of the main dollar pairings and cross rates is EUR-AUD, which is showing a 0.6% gain on the day, printing a two-week high. Currencies are being influenced by the prevailing caution in global stock and commodity markets, which has seen cyclical, commodtiy-correlating currencies weaken, along with the dollar amid declining Treasury yields, while recent underperformers, such as the euro and yen, have staged rebounds. This comes with Eurodollar futures having indicated, as of yesterday, market expectations for the Fed to starting hiking interest rates before the end of 2022, with four quarter-point hikes priced in by early 2024 (contrasting sharply with the guidance that the Fed itself has issued, which has signalled unchanged rates through to 2024 under its new, more inflation tolerant policy rubric). The drop in Treasury yields in today suggest that the Fed tightening view may be coming under some revision. At the same time, investors are digesting prospects for higher corporate taxes linked to President Biden's $2 bln infrastructure plan, which analysts at GS reckon would trim 9% of earnings per share for companies listed in the S&P 500. Another factor to consider is an anticipated rapid acceleration in the Covid vaccine rollout across continental Europe over the coming months, which is being mentioned in at least some market narratives, with supply capacity ramping higher in Europe and across the world. The euro has been trading at a discount as a consequence of its laggard vaccine status compared to the U.S. and UK, and given the spike in new Covid cases.

[USD, JPY]
USD-JPY has dropped to a nine-day low at 109.58, setting up what could be the pair's second down week out of the last six. This has come with U.S. Treasury yields having pulled back nearly 10 bp over the last day, which has fostered a correction in recent currency market themes.

[GBP, USD]
The pound has softened against most peer currencies over the last day. Cable has posted a six-day low at 1.3772, down on the 18-day high seen yesterday at 1.3920. The biggest moves have been seen against the yen and euro, which have outperformed the main currencies we keep tabs on over the last day. This is something of a reversal of recent themes, with the yen and euro having lately been found in the underperforming lane more often than not, while the pound, along with the dollar and dollar bloc currencies, registers among the currency outperformers on the year so far. Yield differential dynamics appear to be at play today, with U.S. Treasury and Gilt yields dropping back more than JGB and Bund yields at the 10-year and other mid- to longer dated maturities. The lacklustre performance of U.S. equities after the in main indices clocked new record highs on Monday appears to be a reason for the softening in yields. Investors are digesting prospects for higher corporate taxes linked to President Biden's $2 bln infrastructure plan, which analysts at GS reckon would trim 9% of earnings per share for companies listed in the S&P 500. Taking a step back, we retain an overall bullish view of the pound, especially against the euro and yen. Sterling on Monday printed a 14-month high versus the euro, which although occurring in holiday-thinned trading reflected the contrasting fortunes of the reopening UK economy with the re-restricted economies across the Channel. The rate of new Covid cases in the UK is 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. This stands in marked contrast to the scene in much of continental Europe.

[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 eight-day highs above 1.2600, despite the prevailing broader weakness in the greenback. The Canadian dollar, which has been amongst the strongest currencies on the year so far, being a principal winner in the reflation trade due to its correlation with oil prices, had been looking due for a correction, with the oil price rally having lost traction in recent weeks. Notable corrections have at the same time been seen in the Canadian dollar versus the euro and yen.