XE Market Analysis: Europe - Apr 08, 2021

The dollar has remained above yesterday's lows, as measured by the DXY index, which printed a 16-day low at 92.14 yesterday. The index since clocked a rebound high at 92.50 before ebbing back towards 92.20. At the same time, the 10-year U.S. Treasury yield has remained several basis points above yesterday's lows, though the short-dated yields edged fractionally lower after both Fed members and the release of the FOMC minutes reaffirmed, in no uncertain terms, the ongoing dovish lean at the central bank. This aided S&P 500 futures to a fresh record peak in overnight trading, setting up Wall Street for a solid opening later. EUR-USD has settled in the upper 1.1800s after pegging a 16-day high at 1.1916 yesterday. USD-JPY, meanwhile, punched out a 10-day low at 109.49. Cable is trading above the eight-day low that was seen yesterday at 1.3723. The Australian and New Zealand dollar's have rebounded today after underperforming yesterday. USD-CAD has settled below the eight-day high that was seen yesterday at 1.2636. The loss of traction in the oil price uptrend has been weighing on the Canadian dollar and other oil-correlating currencies lately. Taking a step back, while the dollar has been correcting lower for a week now, we continue to view the currency has being in a bull trend, at least against the low yielders, including the euro and yen, given the outsized stimulus, successful vaccination program and the prospect for an unleashing in pent-up consumer demand in the U.S. as Covid restrictions are eased. Eurodollar futures this week have priced in a rate high by the end of 2022, despite the Fed's signalling of no tightening out to 2024.

[EUR, USD]
We remain bearish EUR-USD. Yield differentials, although having corrected in recent days, are likely to remain tilted in the dollar's favour. Markets will be 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 punched out a 10-day low at 109.49, 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 from the highs seen in the wake of late Friday's stellar U.S. jobs report, which has fostered a correction in recent currency market themes. We still retain a bullish view of USD-JPY in the bigger picture, given the outsized level of stimulus in the U.S. economy and associated prospect for a further rise in Treasury yields.

[GBP, USD]
Cable is trading above the eight-day low that was seen yesterday at 1.3723. The pound has put in a lacklustre performance of late, though the currency still registers as the second strongest of the main currencies on the year so far (the Canadian dollar being the firmest). 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 has settled below the eight-day high that was seen yesterday at 1.2636. The loss of traction in the oil price uptrend has been weighing on the Canadian dollar and other oil-correlating currencies lately.