XE Market Analysis: Europe - Jun 21, 2021

The dollar has consolidated at modestly softer levels after rallying strongly last week. The DXY dollar index drifted to levels around 92.20, down from Friday's two-month high at 92.40. EUR-USD concurrently lifted to the upper 1.1880s from Friday's two-month low at 1.1846. The yen continued to outperform, with USD-JPY pegging a one-week low at 109.71 while EUR-JPY and AUD-JPY printed respective a two- and four-month lows. The Japanese currency's long-standing proclivity to ascend during phases of risk aversion in global markets has once against become evident, this time as investors adjust to the apparition that the Fed's ultra-accommodative monetary policy spigot won't, as it turns out, forever be bountiful. The Fed's not in isolation, as the likes of the BoE, BoC, Norgesbank, Riksbank, and RBNZ, have recently hinted at less accommodative policy. The Australian and New Zealand dollars, and other cyclical or commodity-correlating currencies, such as the South African rand, have remained off their Friday lows after underperforming last week. One exception is the Norwegian knone, which earlier tumbled to fresh trend lows against the dollar and four-month lows versus the euro. The pound, which is apt to underperform during risk-off positioning phases, edged out a new two-month low at 1.3786 before steadying. The UK currency also saw a four-day low against the euro. USD-CAD remained buoyant, though at the time of writing (early London session), remained just off Friday's seven-week high at 1.2481. In the crypto realm, bitcoin and its brethren dropped sharply after China intensified its crackdown on mining activities. The ongoing high volatility in bitcoin renders it untenable for most potential mainstream users as a means of exchange or unit of account, and a questionable repository of value, while concerns about its environmental impact and legitimacy (underworld use of cryptocurrencies and the endemic problem of scams) are other deterrents. The most recent BoA survey of global fund managers found that 81% of investors believe cryptocurrencies remain at bubble-like elevations.

[EUR, USD]
EUR-USD has found a toehold in early-week trading after dropping sharply, from levels above 1.2100 to a two-month low at 1.1846 on Friday. The break lower, at the prompt of broad dollar gains following the Fed's hawkish tilt, was affirmed by sharply lower daily closes, and pronounced lower weekly close. This price action followed a several-week phase of waning upside momentum. We have been targetting the pair to the. 1.1800 area and below. We expect incoming U.S. data to continue to paint a picture of robust economic recovery, which markets are likely to be sensitive to given the now-increased focus on the Fed's path to an eventual tightening in monetary policy. Fedspeak is a highlight this week with about half of the FOMC hitting the airwaves. Chair Powell will be the focus with his Congressional testimony (Tuesday) on the covid response. The more hawkish Bullard, who is a 2022 voter, kicks off (today) with his comments on the economic outlook. It was his remarks on Friday that set off another rise in the dollar and leg lower in bonds and stocks on Friday, though longer dated Treasuries recovered amid support from curve flattening trades. There are potential countervailing forces that may crimp EUR-USD's downside momentum, although these may not become too apparent just yet. One is the approaching completion of the ratification process of the EU's 750 bln euro recovery fund. Another is the increasing cracks at the ECB's governing council between the dovish and hawkish members. The phrasing of the ECB's recent June statement allowed for a slight scaling back of monthly purchase volumes over the summer months, and come September that is likely to be confirmed. One potential concern that warrants monitory is a nascent rise in new Covid cases in some EU nations, albeit from low levels, which are being driven by the highly transmissible Indian variant. Overall, we remain bearish on EUR-USD, putting weight on the marked U.S. growth differential and potential for markets to bring forward their bets on Fed tightening.

[USD, JPY]
The yen has continued to outperform, with USD-JPY pegging a one-week low at 109.71 while EUR-JPY and AUD-JPY printed respective a two- and four-month lows. The Japanese currency's long-standing proclivity to ascend during phases of risk aversion in global markets has once against become evident, this time as investors adjust to the apparition that the Fed's ultra-accommodative monetary policy spigot won't, as it turns out, forever be bountiful. The Fed's not in isolation, as the likes of the BoE, BoC, Norgesbank, Riksbank, and RBNZ, have recently hinted at less accommodative policy. The BoJ on Friday maintained its monetary policy settings following the conclusion of its two-day review, as had been widely anticipated. The central bank also extended its pandemic funding relief program by six months, as was predicted by the Nikkei newspaper earlier in the week. This didn't impact the yen. The Japanese currency is a low yielding unit 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 40% against the Australian dollar from levels seen at the height of pandemic panic in global markets, in March 2020.

[GBP, USD]
The pound, which is apt to underperform during risk-off positioning phases, edged out a new two-month low versus the dollar today, at 1.3786, before steadying. The UK currency also saw a four-day low against the euro. The risk-off sentiment in global markets, as markets digest the Fed's tilt to the hawkish side, is a negative for the pound, with the UK economy being open and having a large current account deficit. New Covid infections have spiked to a daily rate of over 9k, though there is a silver lining to this cloud in that the spread is being accounted for by younger unvaccinated adults while older, vaccinated people are largely proving to be immune. In the coming weeks, the vast majority of adults over the age of 18 will have been vaccinated with at least one dose. Well over 80% of the adult population now have antibodies, whether through vaccination or having had the virus in the past, and there is growing evidence that exiting vaccines are resistant to the Indian variant (especially among those who have received a double dose of the vaccine). The BoE's Monetary Policy Committee meets this week (announcing Thursday). It should be uneventful and a snooze for markets. We don't expect any changes in policy with basically the same stance as seen in May, including a unanimous vote on maintaining the 0.10% repo rate and another 8-1 vote on QE with Haldane, who is leaving the MPC, again dissenting if favour of lowering the size of the quantitative easing program. The BoE is likely to remain optimistic on growth despite the renewed covid problems, while discounting the acceleration in inflation, still deeming them as temporary. And now with the hawkish shift in the Fed, the BoE has cover to continue it current stance. Look for the Bank to affirm that the rate of QE purchases will slow down, as previously signalled, which the BoE stressed was purely an operational decision that "should not be interpreted as a change in the stance of monetary policy."

[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 remained buoyant, though at the time of writing (early London session), remained just off Friday's seven-week high at 1.2481. The pair last week saw its biggest rally since March 2020. The pair has been underpinned by a cocktail of wider U.S. over Canadian yield differentials, and a drop in oil prices, which is a negative for the Canadian dollar, with the Fed's hawkish tilt having unsettled commodity markets. The CAD-JPY cross, meanwhile, which had been a popular long during the reflation trade, has concurrently dropped to a six-week lows. Oil prices, by the measure of the WTI benchmark, were showing a loss of nearly 4.5% from the pre-Fed announcement 32-month high at $72.99 through to Thursday's 10-day low at $69.77, though prices have since recouped above $71.0. For now, the prevailing bias looks likely to remain to the downside with regard to the Canadian dollar. The OPEC+ group's ongoing sub-capacity supply coupled with rising global demand should keep oil prices underpinned.