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By XE Market Analysis April 8, 2020 3:51 am
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    XE Market Analysis: Europe - Apr 08, 2020

    The dollar has rallied across the board after declining over the last two days. This comes with global stock markets returning to a sputtering price action following a two-day bounce. News that new coronavirus cases in China have doubled over the last day, and that a city in the north of the country went lockdown, just a day after Wuhan, where the pandemic originated, ended its two-month lockdown, spooked investors. Wuhan will now be a major focus as a test case to see is there will be a second wave of infections. The narrow trade-weighted USD index (DXY) lifted by 0.5% in pegging a high at 100.43, which is about a two-third recovery of Tuesday's decline. EUR-USD concurrently declined by almost 0.5% in making a low at 1.0829. USD-JPY has been directionally challenged, holding with 108.50 and 109.00. The biggest mover has been AUD-USD, which fell 0.6% in posting a low at 0.6116, though the Aussie dollar still remains up by over 1% from last week's closing levels after outperforming on Monday and Tuesday. S&P Ratings shifted its rating for Australia to negative as a consequence of the impact of global virus-containing measures on the open Australian economy. USD-CAD climbed about 0.5% in making a high at 1.4082, extending the rebound from yesterday's 12-day low at 1.3943. Oil prices are up over 3% today after diving by nearly 10% yesterday amid estimates for a massive rise in U.S. crude inventories in the latest reporting week. Most of the major oil producing countries will be talking on Friday about curtailing supply, although oil analysts have been arguing that it will be difficult to completely offset the extent of the recent unprecedented level of demand destruction.

    [EUR, USD]
    EUR-USD declined by almost 0.5% in making a low at 1.0829, driven by a broader lift in the dollar as global stock markets returned to a sputtering price action following a two-day bounce. The narrow trade-weighted USD index (DXY) lifted by 0.5% in pegging a high at 100.43, which is about a two-third recovery of Tuesday's decline. We expect EUR-USD to remain in a choppy trading pattern, lacking directional bias.

    [USD, JPY]
    USD-JPY has been directionally challenged, holding with 108.50 and 109.00, though most yen crosses have ebbed back today amid a rekindling in the Japanese currency's safe haven premium. This comes with global stock markets returning to a sputtering price action following a two-day bounce. News that new coronavirus cases in China have doubled over the last day, and that a city in the north of the country went lockdown, just a day after Wuhan, where the pandemic originated, ended its two-month lockdown, spooked investors. Wuhan will now be a major focus as a test case to see is there will be a second wave of infections.

    [GBP, USD]
    The pound has continued to trade with relative stability after sharply underperforming in mid March before rebound some of its lost ground. 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 climbed about 0.5% in making a high at 1.4082, extending the rebound from yesterday's 12-day low at 1.3943. Oil prices, to which the Canadian dollar has a strong correlation with, are up over 3% today after diving by nearly 10% yesterday amid estimates for a massive rise in U.S. crude inventories in the latest reporting week. Most of the major oil producing countries will be talking on Friday about curtailing supply, although oil analysts have been arguing that it will be difficult to completely offset the extent of the recent unprecedented level of demand destruction.

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