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By XE Market Analysis April 7, 2020 4:20 am
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    XE Market Analysis: Europe - Apr 07, 2020

    The commodity currencies outperformed some more, as did many developing-world currencies amid a backdrop of rising stock and commodity markets. Equity markets are amid day two of a rally pinned on tentative signs that the global coronavirus infection and mortality rates might be near to peaking. The Fed's decision to finance new "payroll protection" loans has also bolstered the U.S. economic response plans. AUD-USD has rallied 1.7% in printing a one-week high at 0.6192, while AUD-JPY has rallied by 1.4% in making a high at 67.38. The Aussie dollar is now up 3% from last Friday's closing levels. The Kiwi and Canadian dollars are also up. USD-CAD has dropped to en eight-day low at 1.4011. The dollar, yen and, to a lesser degree, the Swiss franc, have continued to underperform most other currencies. The narrow trade-weighted USD index (DXY) has declined by 0.6% in pegging a five-day low at 100.79, while EUR-USD concurrently lifted by 0.7% in making a five-day high, at 1.0876. The pair is up by just over 1% from its Monday lows. The combination of risk-on positioning in markets and the Fed's aggressive dollar liquidity provisions, which forms part of a crisis-era level of monetary accommodation, have been bearish tonic for the dollar. Dollar underperformance saw USD-JPY dip back under 109.00, though the yen itself trader softer against most other currencies as it safe-haven premium is whittled down.

    [EUR, USD]
    EUR-USD lifted by 0.7% in making a five-day high, at 1.0876. The pair is up by just over 1% from its Monday lows, driven mostly be broader weakness in the dollar. The combination of risk-on positioning in markets and the Fed's aggressive dollar liquidity provisions, which forms part of a crisis-era level of monetary accommodation, have been bearish tonic for the dollar. The narrow trade-weighted USD index (DXY) has declined by 0.6% in pegging a five-day low at 100.79. More of the same can be expected should risk appetite hold up in global markets.

    [USD, JPY]
    USD-JPY dipped back under 109.00, driven by dollar underperformance, with the Japanese currency itself trading softer against most other currencies as it safe-haven premium is whittled down. This price action has come amid a backdrop of rising stock and commodity markets. Equity markets are amid day two of a rally pinned on tentative signs that the global coronavirus infection and mortality rates might be near to peaking. The Fed's decision to finance new "payroll protection" loans has also bolstered the U.S. economic response plans.

    [GBP, USD]
    The pound has more than recovered yesterday's dip seen in a knee-jerk reaction to news that UK Prime Minister Johnson had been admitted to hospital 10 days after testing positive to the coronavirus. Cable has printed a four-day high at 1.2346, extending the rebound from yesterday's low at 1.2213. Sterling has also been trading firmly against the euro and the yen. Taking a step back, the UK currency remains down by 7% against the dollar on the year-to-date, and down versus most of the other main currencies, although has still gained versus the commodity currencies and other high-beta units over the period. The vast majority of the pound's losses were seen from March 10th through to March 21st, which marked the height of the recent spate of acute risk aversion in global markets that generated an epic liquidity crunch that exposed the UK with its outsized financial sector and dependence on foreign investment to finance is current account deficit. The actions of the Fed and other central banks to satiate the demand for cash has given the pound a reprieve. Markets narratives have also been promoting the view 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. Regarding the coronavirus in the UK, the general view is that it's working in flatting the rate of infection, and evidence of this will become increasing evident over the next two weeks. The exit strategy from the lockdown is becoming clearer, as in other countries, and that is that there will be a phased return to work as the rate of infection drops and declines, as the shortage of relevant medial supplies (protective gear, respirators etc) is being met, and as the capacity for testing people increases.

    [USD, CHF]
    EUR-CHF has continued to gravitate around 1.0550-1.0600, 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 to en eight-day low at 1.4011, driven by a combo of broader weakness in the U.S. buck and a concurrent bid for commodity currencies, like the Canadian dollar, amid hopes for improved demand conditions for commodities, pinned on tentative signs that the peak coronavirus infection and mortality rate might be near. Oil prices, meanwhile, to which the Canadian dollar correlates with to quite a high degree, have been choppy, dropping yesterday on news that Russia and Saudi Arabia has delayed a meeting to negotiate a crude output reduction, before rebounding today with the two due to talk, along with other major oil producers, on Thursday.

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