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XE Market Analysis: Europe - Apr 09, 2021

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The dollar has steadied after printing fresh lows yesterday, which has been concomitant with the 10-year U.S. Treasury yield lifting back above 1.650% after yesterday posting a two-week low just under the 1.630% mark. The DXY dollar index has lifted to around 90.30 from the 17-day low that was logged at 92.0. EUR-USD has concurrently ebbed back under 1.1900 from a 17-day peak at 1.1928, while USD-JPY has recouped to the mid 109.00s from a 15-day low at 109.00. Cable, meanwhile, has dropped to a new two-week low at 1.3671. The pound has at the same time sank to a fresh six-week high versus the euro and a two-week low in the case against the yen. Some narratives have been linking the UK currency's notable underperformance this week to the blot-clotting concerns of the Oxford AstraZeneca Covid vaccine, though the yield correction in Gilts has been more pronounced than in some peers, including Bund and JGB yields, which is likely a stronger reason for sterling's fall out of favour. The 10-year Gilt yield is at prevailing levels showing a 1 bp bigger decline from last week's highs compared to even the U.S. 10-year yield. The Australian dollar has dropped quite steeply, by 0.8% in making an eight-day low versus the greenback at 0.7588, breaking through the lows of the choppy range that's been seen this week. Softness in base metal prices and a sputtering price action across Asian stock markets have been weighing on cyclical currencies, such as the Aussie. Regarding stock markets, the MSCI All Country World index edged out a new record high during the early part of the Asia-Pacific session before drifting back. Chinese markets led equity markets lower in Asia, with perkier than expected inflation data out of China raising investor concerns of policy tightening.

[EUR, USD]
We remain bearish EUR-USD, and view the rebound over the last week as an opportunity to sell. 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 has recouped to the mid 109.00s from a 15-day low at 109.00. The yen has found itself in the outperforming lane of currencies this week. USD-JPY had been the biggest gainer amid the recent rising phase in U.S. Treasury yields, with 10-year JGB yields remaining rooted near 0% under the BoJ's yield curve control regime, so it stands to reason that the pair would underperform amid a 10 bp correction in the U.S. T-note yield from last week's highs. The pair has corrected from the 13-month high that was seen last week at 110.97. Yen crosses have also traded softer, although by a lesser degree than USD-JPY. Despite the yen's rebound, the currency still registers as the weakest performer on the year so far, and by some margin, with net declines of nearly 6% versus the dollar and nearly 7% in the case against the Canadian dollar. Data out of Japan this wee showed a stronger than expected current account surplus in February had little impact on the forex market. The surplus has surged during the pandemic era, driven by trade and, more especially, a rise in income from overseas investments, which gives rise to repatriation flow, particularly during times of heightened uncertainty in global markets. Tokyo also announced new Covid restrictions, with little more than three months to go until Japan hots the Olympics. Japan is behind even continental Europe in rolling out Covid vaccinations (although Japan, likely many other Asian nations, has a much lower mortality rate than western nations, most likely to the lower rate of obesity in the population). We still retain a bullish view of USD-JPY, given the outsized level of stimulus in the U.S. economy and associated prospect for a further spikes in longer-dated Treasury yields.

[GBP, USD]
Cable has dropped to a new two-week low at 1.3671. The pound has at the same time sank to a fresh six-week high versus the euro and a two-week low in the case against the yen. Some narratives have been linking the UK currency's notable underperformance this week to the blot-clotting concerns of the Oxford AstraZeneca Covid vaccine, though the yield correction in Gilts has been more pronounced than in some peers, including Bund and JGB yields, which is likely a stronger reason for sterling's fall out of favour. The 10-year Gilt yield is at prevailing levels showing a 1 bp bigger decline from last week's highs compared to even the U.S. 10-year yield.

[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 reversed most of the decline seen yesterday, continuing what has been a choppy phase for the pairing. The loonie has been underperforming lately. The loss of traction in the oil price uptrend has been weighing on the Canadian dollar and other oil-correlating currencies lately. The decision by the OPEC+ group of oil producing nations this week to ease output restrictions by 2.1 mln barrels, alongside a build in U.S. weekly oil inventories, have been keeping a lid on oil prices. Front-month WTI futures are near the midway of a whippy sideways range that's been seen over the last couple of weeks, near $59.50, which is over 12% down on the trend peak that was seen in early March. The market is already factoring in a pick up in demand in the second half of the year, by which time the hope is that vaccination programs will have been become advanced enough globally, particularly on continental Europe, to allow for economic reopening. This prognosis was evident at the OPEC+ meeting, allowing for some lifting in supply quotas. On the domestic front today, Canada's March employment report is expected to show a 100k headline rise, though with risks to the upside. This would following the 259.2k climb in February. The unemployment rate is projected at 8.1% from 8.2%, while hourly wages will be of considerable interest given ongoing worries about inflation. Covid vaccines and stimulus have been underpinning the recovery. We anticipate that the loonie will return to outperformance mode before long, which is hinged on successful vaccine rollouts in North America and among other major economic regions.

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