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By XE Market Analysis April 3, 2020 3:46 am
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    XE Market Analysis: Europe - Apr 03, 2020

    Narrow ranges have been prevailing among the main dollar pairings and associated crosses, which has come with global stock markets undergoing a sputtering price action. Asian stock markets have traded mostly lower, and S&P 500 futures are showing a 1.2% decline, correcting after the cash version of the index close out yesterday with a 2.3% gain. Oil prices rallied by a massive 24% yesterday, partly on news that Russia and the Saudis had reached a deal on restricting crude supply, though a lack of specifics has fostered doubts in the crude market. Front-month WTI crude prices have retreated by over 4% to levels just above $24.00 after peaking yesterday at $27.39 (closing yesterday at $25.32). Global markets are now lacking a sense of direction. Caution prevails with many key global economies remaining in lockdowns of still unknown duration. In the currency realm, EUR-USD has posted a less than 40-pip range, in the lower-to-mid 1.08s, and USD-JPY a less than 42 pip range, centred on 108.00, with both remaining well within recent ranges. Most commodity currencies have also seen narrow ranges, though the Canadian dollar has come under some pressure, concomitantly with the softening in oil prices today. This has floated USD-CAD up by nearly 0.5% in making an intraday high at 1.4195, which recoups a good portion of the losses seen yesterday. Broadly speaking, most markets have entered consolidative phase. Fed-led global central bank actions have restored liquidity, which along with monetary easing and massive fiscal expansion have enable global asset markets to find some relative stability. More of the same seems likely.

    [EUR, USD]
    EUR-USD has ebbed back towards yesterday's nine-day low at 1.0820, with the pairing remaining heavy, albeit within a narrow range so far today, after dropping on each day this week through to yesterday, from the 17-day high that was seen last Friday at 1.1148. The euro still remains well 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 a narrowing path this week, falling to levels below 105 bp, which may be helping limit EUR-USD's downside momentum, although evidently not fully offsetting it. 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. 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 a less than 42 pip range, centred on 108.00, though still managed to scratch out a four-day high at 108.14. Most yen crosses have been trading neutrally, against a backdrop of global stock markets undergoing a sputtering price action. Asian stock markets have traded mostly lower, and S&P 500 futures are showing a 1.2% decline, correcting after the cash version of the index close out yesterday with a 2.3% gain. Oil prices rallied by a massive 24% yesterday, partly on news that Russia and the Saudis had reached a deal on restricting crude supply, though a lack of specifics has fostered doubts in the crude market. Front-month WTI crude prices have retreated by over 4% to levels just above $24.00 after peaking yesterday at $27.39 (closing yesterday at $25.32). Global markets are now lacking a sense of direction, though caution prevails with many key global economies remaining in lockdowns of still unknown duration. 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 in the weeks and months ahead.

    [GBP, USD]
    Sterling is again ranking among the currency outperformers this week. 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 up by nearly 0.5% in making an intraday high at 1.4195, which recoups a good portion of the losses seen yesterday. Oil prices rallied by a massive 24% yesterday, partly on news that Russia and the Saudis had reached a deal on restricting crude supply, though a lack of specifics has fostered doubts in the crude market. Front-month WTI crude prices have retreated by over 4% to levels just above $24.00 after peaking yesterday at $27.39 (closing yesterday at $25.32), which has seen the Canadian dollar come under some concomitant pressure. Oil prices still remain down by over 60% from January highs. Given that demand will remain weak for a likely 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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