XE Market Analysis: Europe - Jun 30, 2021

The dollar majors have been trading with little directional impulse. EUR-USD has settled in a narrow range near 1.1900, above yesterday's nine-day low at 1.1878, and USD-JPY has been plying a sideways range near the 110.50 level, above Tuesday's eight-day low at 110.48. Cable has remained heavy, though above yesterday's nine-day nadir at 1.3815. The Australian and New Zealand dollars have managed to find a toehold after dropping quite sharply over the last couple of days as Covid lockdowns were implemented across many areas of Australia and after New Zealand closed its travel corridor with its neighbour. The situation has slightly eroded the otherwise strong conviction markets have been holding for the RBA to make a baby-step towards tighter monetary policy at its review next week (by refraining from extending its 0.1% 3-year yield target from the April 2024 bond to the November 2024 issue, and removing standing guidance that rates are unlikely to rise until 2024). The South Africa rand has also managed to finding a footing after weakening. Covid cases in South Africa have been spiking sharply. USD-CAD edged out a nine-day high at 1.2404, extending the run higher from the two-week low seen last week at 1.2250. The combo of the Fed's recent hawkish tilt and softer oil prices have been underpinning the pairing. The latest rise in global Covid cases, driven by the highly transmissible Delta variant, has countervailed what had been a strongly bullish sentiment in crude markets. There have also been expectations for the OPEC+ group to agree on increasing supply quotas from August.

[EUR, USD]
EUR-USD has settled in a narrow range near 1.1900, above yesterday's nine-day low at 1.1878. The pair saw three weeks of accelerating losses before posting a rebound week last week. Momentum remains heavy, however, 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.

[USD, JPY]
USD-JPY has been plying a sideways range near the 110.50 level, above Tuesday's eight-day low at 110.48. The Japanese currency, like the dollar, found some safe haven draw from investors, with global equity markets sputtering in the face of a sharp rise in Covd cases in Asia and other parts of the world. 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. 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 has remained heavy, though above yesterday's nine-day nadir at 1.3815. News that the UK has seen 20k-plus daily spikes in new Covid cases over the last two days, continuing 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 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. Final June manufacturing PMI data is up on Thursday. We are taking a somewhat neutral view on the pound, overall, though see downside risk in GBP-USD on the view that this week's slate of U.S. data will come in on the firm side, especially the June payrolls report (Friday). The dollar may also outperform the pound on an ongoing safe haven bid in the face of the global spread of the Delta virus variant.

[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 edged out a nine-day high at 1.2404, extending the run higher from the two-week low seen last week at 1.2250. The combo of the Fed's recent hawkish tilt and softer oil prices have been underpinning the pairing. The latest rise in global Covid cases, driven by the highly transmissible Delta variant, has countervailed what had been a strongly bullish sentiment in crude markets. There have also been expectations for the OPEC+ group to agree on increasing supply quotas from August.