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XE Market Analysis: Europe - Jun 29, 2021

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The dollar has been trading with a firming bias, overall, posting fresh highs versus some currencies, such as the pound and Australian dollar, although so far remaining off highs seen yesterday against other currencies, such as the euro. The spate of cautious trading in world stock markets, due to concerns about the highly transmissible Delta variant's spread in Asia and elsewhere, has revived some safe haven demand for the U.S. currency. Data out of Asia have been adding to the wary sentiment. Out of Japan today, while retail sales rose, the jobless rate hit a five-month high as a consequence of virus restrictions. This followed weekend data showing profits at Chinese industrial companies falling in May. The DXY dollar index yesterday printed a one-week high at 92.02, and has today come with 4 pips of this level. EUR-USD came with a few pips of the one-week low the pair saw on Monday. Cable, meanwhile, pegged an eight-day low at 1.3855. At the same time, the pound ebbed a two-day low against the euro, and a one-week low versus the yen. News that the UK saw a 22k spike in new Covid cases yesterday, which continue on a steep upward trajectory, seems to have weighed on sterling, even though this has been driven by young unvaccinated adults (a low risk group regardless of vaccine status) and even though the hospitalisations and mortality rates remain a basement levels. USD-JPY traded just below the 110.50 level for the first time in a week, reflecting the modicum of outperformance the yen has been seeing, with the Japanese currency, like the dollar, being a safe haven draw for investors. Incoming data will continue to be scrutinized, culminating this week with the June U.S. payrolls showstopper. Our June nonfarm payroll estimate sits at 550k, close to May's 559k rise. The gain is consistent with our solid 7.8% Q2 GDP growth estimate. The Fed's recent hawkish tilt, while fully digested by markets, will likely mean that markets are more sensitive to above-forecast U.S. data, especially top-tier data, than they would otherwise have been.

[EUR, USD]
EUR-USD came with a few pips of the one-week low the pair saw on Monday. The low reflected a broader dollar safe haven bid amid a backdrop of sputtering global equity markets. Concerns about the spread of the highly transmissible Delta variant of the SARS-Cov2 coronavirus in Asia and elsewhere have been worrying markets. EUR-USD saw three weeks of accelerating losses before posting a rebound week last week. Momentum remains heavy, and we look for further downside from here. A clear break of consolidation support at 1.1910-15 would help confirm this. U.S. President Biden's infrastructure plan, valued at $1.2 trillion over eight years (of which $579 billion is new spending), is looking likely to achieve Congressional support. The June U.S. payrolls report, due Friday, is also expected to rise by a robust 550k in the nonfarm headline, close to May's 559k rise. The gain is consistent with our solid 7.8% Q2 GDP growth estimate. The Fed's recent hawkish tilt, while fully digested by markets, will likely mean that markets are more sensitive to above-forecast U.S. data, especially top-tier data, than they would otherwise have been. As for the Eurozone, data due this week are likely to add to signs that economic activity is accelerating faster than expected, with staff shortages now adding to supply constraints in limiting overall output growth amid a strong rebound in demand. This may present a countervailing impact on EUR-USD, limited the pair's downside potential.

[USD, JPY]
USD-JPY traded just below the 110.50 level for the first time in a week, reflecting the modicum of outperformance the yen has been seeing relative to the greenback, with the Japanese currency, like the dollar, being a safe haven draw for investors. The Fed's recent subtle policy shift towards the hawkish side doesn't in itself warrant a sustained correction in global equity markets, which have been focusing on growth potential, aided by policymaker pledges that a policy tightening remains along way off. The MSCI all country world equity index last week scaled to a fresh record high, although has since drifted lower amid concerns about the spread of the Delta variant of the SARS-Cov2 coronavirus. 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 40% against the Australian dollar from levels seen at the height of pandemic panic in global markets, in March 2020.

[GBP, USD]
Cable pegged an eight-day low at 1.3855. At the same time, the pound ebbed a two-day low against the euro, and a one-week low versus the yen. News that the UK saw a 22k spike in new Covid cases yesterday, which continue on a steep upward trajectory, seems to have weighed on sterling, even though this has been driven by young unvaccinated adults (a low risk group regardless of vaccine status) and even though the hospitalisations and mortality rates remain a basement levels. Despite this, incoming UK economic data, at least of the more timely and forward looking variety, are likely to affirm an ongoing robust recovery (the BoE upwardly revised its 2021 GDP growth projection to 5.5% from 4.35% in May), although momentum has been zapped somewhat, partly with the government having delayed the full reopening of the economy by a month, to July 19. The UK calendar this week still has final Q1 GDP and currency account data (Wednesday), and the final June manufacturing PMI data (Thursday). We are taking a somewhat neutral view on the pound, though see downside risk in GBP-USD should this week's slate of U.S. data come in on the firm side, especially the June payrolls report (Friday).

[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 lifted to one-week highs in the upper 1.3700s. A broadly firmer U.S. dollar coupled with the second sharpest correction oil prices have seen in almost six weeks have given the pair buoyancy. Resistance is now at 1.2400, the 100-day moving average, with support seen at Friday's low of 1.2272. WTI crude prices tumbled by over 2.5% from yesterday's 32-month high at $74.45 in posting a low at $72.55 earlier today. The spread of the Delta variant of the SARS-Cov2 coronavirus globally has been a dominant factor in sending oil prices, along with equities and other commodity prices, lower. Expectations for the OPEC+ group to increase supply in August has also been in the mix, although the Covid situation may ultimately deter producing nations from easing supply restrictions just yet. Some health experts warned that the Delta variant has the potential to cause dense outbreaks of Covid in U.S. states where there has been a low vaccination rate. In Europe, Portugal, Spain and Germany have issued new travel restrictions. Asian nations have also been afflicted, causing new restrictive measures in Indonesia, Thailand, Japan and elsewhere. Much of Australia is in lockdown. Higher restrictions mean lower oil demand, which is in turn a negative influence on oil correlating currencies, such as the Canadian dollar.

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