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XE Market Analysis: Europe - Apr 14, 2021

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The dollar has remained under pressure following the 8 bp drop in the 10-year U.S. Treasury yield yesterday, which came despite above-forecast CPI data. Yields have ticked slightly higher so far today, but remain near one-month lows at this maturity. Markets have evidently bought into the Fed's view that inflation will remain contained beyond the well-flagged burst of base-effect driven rise. The solid demand seen at the 30-year Treasury bond reflected this. Another factor at play has been news that the rollout of Johnson & Johnson's Covid vaccine has been halted temporarily due as incidents of problematic side effects are investigated. This struck a chord in markets as Fed chief Powell had warned over the weekend that Covid remained a threat to economic recovery, though didn't stop the S&P 500 from scaling to a new record high yesterday, not the MSCI All World index from doing likewise earlier today. How long this Goldilocks scenario of a record making ascent in stock markets, a contained inflation outlook and the associated decline in yields, at the same time of economic recovery, can sustain is open to question, especially given the level of global fiscal and monetary stimulus in the works, which dwarfs that seen in the wake of the 2008-9 financial crisis. The dollar, as measured by the narrow trade-weighted DXY index posted a four-week low at 91.67. EUR-USD concurrently made a four-week high at 1.1973. Cable logged a one-week high at 1.3800, and AUD-USD printed a three-week high at 0.7486. USD-JPY, meanwhile, ebbed to a three-week low at 108.75. Both Singapore's MAS and New Zealand's RBNZ left policy settings unchanged, as had been widely anticipated. The RBNZ reaffirmed its commitment to expansionary policy, as as had been expected.

[EUR, USD]
EUR-USD made a four-week high at 1.1973 on the back of general dollar weakness. The dollar's yield differential advantage has ebbed back over the last day.

[USD, JPY]
USD-JPY ebbed to a three-week low at 108.75, driven lower by a softer dollar. The forex market has been continuing to be influence by shifting yield differentials.

[GBP, USD]
Cable logged a one-week high at 1.3800 on dollar weakness. The pound failed to sustain gains that were in early-week trading. The currency still registers as year-to-date's second strongest of the main currencies we keep tabs on, behind the Canadian dollar, though the pound has clearly lost upside momentum. A batch of UK data, released yesterday, showed the BRC retail sales data for March came in strong, while February data on production, GDP and trade came in mixed relative to expectations, but showing improvement in growth. More timely and forward looking indicators out of the UK, most notably the March PMI surveys, have pointed to an accelerating expansion in activity in the months ahead, which is a scenario that has been factored by market participants.

[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 been holding a narrow range in the mid 1.2500s, despite broader weakness in the greenback. The Canadian dollar has itself been trading on a weakening tack versus other currencies, posting one-week lows today versus the Aussie dollar, for instance, and a five-day lows versus the euro. This has been despite a lift in oil prices, with WTI front-month benchmark futures printing a nine-day high at $61.11.

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