XE Market Analysis: North America - Jun 02, 2021

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The dollar is moderately firmer today. The DXY USD index has printed a two-day high at 90.01, which reverses a good portion of the decline seen on Monday and yesterday. EUR-USD concurrently ebbed to two-day lows under 1.2200 while USD-JPY lifted to a two-day high at 109.85. The U.S. currency still remains at softer levels versus most currencies from week-ago levels. The 10-year Treasury yield has remained anchored near 1.60%. The Australian dollar briefly lifted following an above-forecast 1.8% q/q print on Australian Q1 GDP data, but failed to sustain gains and subsequently drifted lower. AUD-USD posted a one-week high at 0.7773 before settling about half a big figure lower. News that Melbourne, which is Australia's second most populous city, has extend lockdown restrictions for a second week, in an attempt to quell a outbreak of Covid infections, seemed to weigh on the Aussie. Cable has drifted to a low at 1.4126, which almost entirely reverses the gains seen last Thursday after the BoE's Vlieghe said that an "early" rate hike was possible provided there was a smooth transition out of the furlough. The pound has also lost ground to the euro and other currencies. A steady creep higher in new Covid cases in the UK and a prime minister publicly ruminating that the fourth and final phase of reopening, which is scheduled for June 21, might be delayed, has weighed on sterling. Elsewhere, the Turkish lira dripped sharply after President Erdogan repeated his demand for lower interest rates. Ahead today, the Fed's the Beige Book report on the economy, which has been compiled in preparation for the upcoming FOMC meeting (on 15-16 June), should continue to reflect improving economic conditions and improving outlook as vaccine distribution widens, virus cases slow, and the economy continues to reopen more fully. We don't, however, expect to see any nuances in this report that will suggest how the FOMC might lean in terms of starting to think about talking about tapering.

EUR-USD is lower after yesterday pegging a six-day high at 1.2241. The five-month high that was seen last week at 1.2267 has for now slipped back out of focus. The euro has lately also been doing well in the popularity stakes, from the improving outlook in the Eurozone economy, with the recent wave of Covid infections having been quelled and the EU has finally got its act together with its vaccination program. Incoming data out of the Eurozone having been backing the recovery story, too, and the ratification process behind the 750 bln euro pandemic relief fund is also in the final phases. As for the U.S. situation, the unfolding inflation story will be the key determinant of dollar direction. The dominant prevailing view on inflation risk is that price pressures will abate in Q3 as year-on-year base effects narrow and supply bottlenecks are ironed out, which -- for now at least -- is keeping Treasury yields anchored, with the Fed expected to hold out on ZIRP and QE. The CME's Fedwatch Tool shows that market positioning is implying a probability for a 25 bp Fed hike by year-end around 9%. Eurodollar futures are implying a first 25 bp hike in 2023, about a year ahead of what the Fed has been signalling. We expect EUR-USD's prevailing upside bias to sustain for now, though see downside risk should Fed tapering start to look more inevitable. This would be when the U.S. versus Eurozone growth differential is matched by a Fed versus ECB tightening expectations differential, which would be the circumstance for the directional bias of EUR-USD to shift to the downside. A major focus will be on this Friday's U.S. May jobs report following the massive disappointment of the April report. Labour supply has and continues to be restricted by pandemic and reopening related factors. These should be worked through over the coming months.

USD-JPY has recouped back above 109.50. The yen is a low yielding currency of a surplus economy, and tends to weaken during risk-on phases in global markets, and strengthen during times of pronounced and sustained risk aversion. It should be of no surprise that the yen has been the weakest performing of the G10+ currencies during the reflation trade. The Japanese currency, for instance, is registering a loss of over 20% against the Australian dollar from levels seen a year ago, when many of the world's biggest economies were in the grips of 'mother' lockdowns.

Cable has drifted to the lower 1.4100s, almost entirely reversing the gains seen last Thursday after BoE's Vlieghe said that an "early" rate hike was possible (provided there was a smooth transition out of the furlough). The pound has also lost ground to the euro and other currencies. A steady creep higher in new Covid cases in the UK and a prime minister publicly ruminating that the fourth and final phase of reopening, which is scheduled for June 21, might be delayed, has taken the shine out of sterling. We don't expect the prevailing lift in new Covid cases to develop into a full blown wave as the spread is mostly among younger, unvaccinated people, and with over 75% of the adult population now having received at least one dose of a vaccine. We retain an overall bullish view on the pound. The UK's main equity indices are replete with globally-focused cyclical stocks, which continue to trade at a discount relative to global peers, and which should benefit as major economies rebound and with investors search for value. The UK's successful Covid vaccination program is continuing at pace, some 75% of the adult population now having received at least one dose of a vaccine. There is also building evidence that the vaccines are effective against the new variants, including the highly transmissible Indian variant.

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 has settled modestly higher after printing a six-year low at 1.2005 yesterday. At the same time, the CAD-JPY cross, which we have been bullish on for nearly a year, has settled slightly lower after hitting a new 41-month.Oil prices have been underpinning the Canadian dollar and other oil correlating currencies, such as the Norwegian krone. WTI benchmark futures yesterday surged to a high at $68.87, which is the highest level seen since October 2018, after the OPEC+ group agreed to maintain production quotas -- ie maintain supply at sub-capacity levels -- despite improving global demand projections. We remain bullish on the Canadian dollar in the bigger-picture prognosis, given the success of Covid vaccinations and ramping-up global supply capacity for vaccine production, which along with massive global stimulus should keep the global reflation trade on track into 2022.

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