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By XE Market Analysis April 2, 2020 4:14 am
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    XE Market Analysis: Europe - Apr 02, 2020

    Finally a day of narrow ranges and calmness in currency markets. The main dollar pairings and cross rates have so far seen little direction, remaining well within ranges seen yesterday for the most party, though the Canadian dollar and Norwegian krona gained amid a strong rally in oil prices. USD-JPY and yen crosses have been trading relatively neutrally. While Asian stock markets have traded mostly lower, S&P 500 futures have lifted by nearly 1.5% after the cash version of the index closed yesterday 4.4% for the worse, oil prices have rallied by over 10%, and most other industrial commodity prices have also gained. Regarding the oil price surge, a Bloomberg report, citing sources will inside knowledge, said that China has commenced buying oil prices or its emergency reserves. Beijing is reportedly aiming to build up a crude stockpile what would cover 90 days of net imports with the possibility of expanding this to 180 days. China is the world's biggest oil imported and is obviously taking advantage of the 60%-odd collapse in oil prices. USD-CAD has concomitantly dropped by over 0.6%, driven by a bid for the Canadian dollar, which correlatives closely with oil prices given the importance in crude exports in Canada's terms of trade. USD-CAD posted a low at 1.4079, and has so far remained above its Wednesday low at 1.4060. The Norwegian currency is also up. The other commodity currencies have also gained. AUD-USD is up over 0.5%, printing a high at 0.6119, though remaining comfortably shy of yesterday's high at 0.6174. Elsewhere, EUR-USD has plied a range of less than 40 pips, which is narrow by recent standards, around the mid 1.0900s. Ditto for Cable, which is gravitating around 1.2400 for a second day.

    [EUR, USD]
    EUR-USD has plied a range of less than 40 pips, which is narrow by recent standards, around the mid 1.0900s. This marks a pause after dropping over the last three days, from a 16-day high at 1.1148 through to yesterday's one-week low at 1.0903. This leaves the pair above the low seen during the recent dollar liquidity crunch, at 1.0637, before the Fed and other central banks stepped in to satiate the demand for cash dollars. The U.S. 10-year T-note versus Bund yield spread has resumed its narrowing, falling today to near 105.0 bp. The spread was over 200 bp as recently as mid February, and the near 100 bp of narrowing is testament to the Fed's rate cuts and pledge of unlimited dollar supply. This should keep EUR-USD directionally biased to the downside for now. Bigger picture, what the relative political and economic impact that virus-containing measures will have in Europe and the U.S. are unclear, though the issue of the viability of the euro and the EU itself is once again being held in doubt by euroskeptics.

    [USD, JPY]
    USD-JPY and most yen crosses have been trading relatively neutrally so far today, though some commodity currency yen crosses have gained. While Asian stock markets have traded mostly lower, S&P 500 futures have lifted by nearly 1.5% after the cash version of the index closed yesterday 4.4% for the worse, oil prices have rallied by over 10%, and most other industrial commodity prices have also gained. Regarding the oil price surge, a Bloomberg report, citing sources will inside knowledge, said that China has commenced buying oil prices or its emergency reserves. Beijing is reportedly aiming to build up a crude stockpile what would cover 90 days of net imports with the possibility of expanding this to 180 days. China is the world's biggest oil imported and is obviously taking advantage of the 60%-odd collapse in oil prices. The Fed's and other central banks efforts to stave off a liquidity crunch have helped calm markets, though the economic impact of worldwide virus-containing measures, which will persist for a still-unknown duration, remains a major concerns for investors. We continue to anticipate USD-JPY trading at sub-100.00 levels on the assumption that there will be more Japanese repatriation and more safe-haven demand for the yen.

    [GBP, USD]
    Sterling has staged a rebound in recent sessions versus most currencies. Market narratives have been pointing to the impact of the Fed's launching (announced Tuesday) of a new "FIMA" facility, which will start on April 6 and allow foreign central banks to obtain dollars without selling Treasuries. This will run alongside the swap lines created with 14 central banks, and the two should ease strains in global dollar funding. This is seen as a particular positive for the pound, given the the UK's recently proven vulnerability to global liquidity shortages, with its large financial sector and dependence on foreign investment inflows (equivalent to about 4% of GDP) to finance its large current account deficit. The pound had underperformed even commodity currencies during the worst of the recent global liquidity crunch, which ran from about March 10th through to March 19th, before measures by the Fed and other central banks provided a mitigating impact. Sterling lost about 10% of its value in trade-weighted terms over this period, and tumbled by 12% versus the dollar, hitting a 35-year low, and a 11-year low against the euro. The worst now looks to be over for the pound, especially with markets starting to bet that the UK will ask the EU for an extension of its post-Brexit transition membership of the Union's customs union and single market. Neither the UK nor EU has the resources to conduct detailed trade negotiations under the the prevailing circumstance of the coronavirus crisis. This is seen as sterling positive as it will avoid the possibility of the UK leaving the transition period and shifting a big chunk of its trade onto less favourable WTO trade terms.

    [USD, CHF]
    EUR-CHF has continued to gravitate around the 1.0600 level, holding above the five-year low that was seen on March 9th at 1.0505. Assuming the coronavirus crisis persists, as looks highly likely, this should maintain Swiss franc's safe haven premium, which at the least should limit upside scope of EUR-CHF. The U.S. in January added Switzerland to its list of currency manipulators. The move seems a bit rich given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argues that Switzerland needs a more expansive fiscal policy.

    [USD, CAD]
    USD-CAD has dropped by over 0.6%, driven by a bid for the Canadian dollar amid a 10%-plus oil price surge. The pair posted a low at 1.4079, though has so far remained above its Wednesday low at 1.4060. A Bloomberg report, citing sources will inside knowledge, said that China has commenced buying oil prices or its emergency reserves. Beijing is reportedly aiming to build up a crude stockpile what would cover 90 days of net imports with the possibility of expanding this to 180 days. China is the world's biggest oil imported and is taking advantage of the 60%-odd collapse in oil prices. Front-month WTI crude prices posted at six-day high at $22.55, but still remain down by just over 65% from the highs seen in early January. This level of price decline in Canada's principal export, while it sustains, marks a significant deterioration in the Canadian economy's terms of trade. Assuming that China's buying spree won't close this gap substantially, given the glut of crude flooding the market, and given that demand will remain weak for a historically protracted amount of time, we anticipate that the Canadian dollar will remain apt to underperformance. USD-CAD revisiting its recent 17-year high at 1.4669 seems likely before long.

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