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By XE Market Analysis April 15, 2020 3:58 am
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    XE Market Analysis: Europe - Apr 15, 2020

    The commodity currencies have come under pressure with stock markets taking a step back in Asia today, and with S&P 500 futures showing declines of over 0.5%. Oil prices have also remained heavy after WTI benchmark futures printed a two-week low at $19.95 late yesterday, with the OPEC++ group's near 10 mln barrel per day output cut, and hints of bigger cuts to dome, doing little to convince crude markets that producers have the will to cut production sufficiently to plug the massive supply/demand gap amid the prevailing lockdowns across many global economies. The IMF forecast the world economy will see its sharpest contraction since the 1930s depression, which by now will not surprise many, while a study from the Harvard School of Public Health highlighted that the return to normal may be a long road, saying (of the U.S.) that "intermittent distancing may be required into 2020 unless critical care capacity is increased substantially or a treatment of vaccine becomes available." In forex markets, the biggest movers have been AUD-USD, NZD-USD, AUD-JPY and NZD-JPY, which have all racked up losses of well over 1%. AUD-USD, after a run of seven consecutive days highs, has printed a two-day low at 0.6355. The pair still remains up by over 15% from the 17-year low that was printed on March 19th. The Canadian dollar has also declined, setting USD-CAD up for its first up day in a week, with the pair posting a two-day high at 1.3960. Elsewhere, the dollar and yen have posted moderate gains versus the euro and most other currencies. EUR-USD drifted to a low at 1.0957. The pair remains near the halfway mark of the volatile range that was seen during the height of the market panic in March.

    [EUR, USD]
    EUR-USD drifted to a low at 1.0957. The pair remains near the halfway mark of the volatile range that was seen during the height of the market panic in March. The rapid deployment of monetary stimulus measures by the Fed, and expectations for more, have impacted the dollar in recent weeks, satiating what had been a surge in demand for the world's reserve currency while causing U.S. Treasury yield spreads versus the Bund benchmark to drop and stay down (the 10-year T-note versus Bund yield differential is down by about 115 bp from levels seen in just a month ago). Economic data on both sides of the Atlantic has been a secondary consideration even as the reports begin to show the depth of the devastation wrought by the shuttering of the economy last month -- the huge declines expected in activity have been realized, and then some. Last week, to some relief, European and Eurozone finance ministers finally managed to agree on a joint support package to address the immediate costs of measures designed to address the economic impact of the COVID-19 pandemic. There are now a number of states in the U.S. and a number of countries in the Eurozone, including Spain and Italy, that looking at a phased reopening in economies. A study from the Harvard School of Public Health highlighted, however, that the return to normal may be a long road, saying (of the U.S.) that "intermittent distancing may be required into 2020 unless critical care capacity is increased substantially or a treatment of vaccine becomes available." We expect EUR-USD, after whipping between a 1.0637 low and a 1.1494 high in March, to remain in a choppy trading pattern, lacking clear directional bias for now.

    [USD, JPY]
    The yen has lifted against most currencies today, particularly the commodity currencies amid a backdrop of flagging risk appetite in global equity and commodity markets. Oil prices have also remained heavy after WTI benchmark futures printed a two-week low at $19.95 late yesterday, with the OPEC++ group's near 10 mln barrel per day output cut, and hints of bigger cuts to dome, doing little to convince crude markets that producers have the will to cut production sufficiently to plug the massive supply/demand gap amid the prevailing lockdowns across many global economies. The IMF forecast the world economy will see its sharpest contraction since the 1930s depression, which by now will not surprise many. AUD-JPY and NZD-JPY have racked up losses of over 1%. CAD-JPY, EUR-JPY and GBP-JPY have also declined, as have most other yen crosses. USD-JPY has seen a comparatively narrow range amid concurrent dollar perkiness, though the pair still managed to scrape out a two-week low at 106.93. We continue to anticipate USD-JPY trading at sub-100.00 levels.

    [GBP, USD]
    Cable has corrected to the lower 1.2300s after yesterday posting a one-month high at 1.2648, which extended the rebound from the 35-year low that was seen on March 20th at 1.1409. Sterling had been holding up well amid the recent backdrop of optimism in global stock markets, with the UK currency having become apt to correlative positively with risk appetite during the coronavirus crisis era. The pound is showing an average gain of just over 3% against the dollar, euro and yen from month-ago levels. UK Prime Minister Boris Johnson is on the mend after coming down with COVID 19. The UK lockdown has been extended for another three weeks, to March 7th. The coronavirus infection rate of increase is slowing, though the mortality rate is still rising. The general view is that the lockdown is working, and that this will become increasing evident in the coming weeks. The exit strategy from the lockdown is being debated, as in other countries, though the timing in the UK's case remains uncertain. A phased return to work is likely once the infection rate is in clear retreat, though this would still be contingent on there being a satisfactory supply of relevant medial supplies (protective gear, respirators etc) and testing capacity, which might be one or two months away. The 35-year low the pound saw in March had been the product of sharp underperformance during the height of mid-March liquidity crunch. The UK currency remains down by about 5% 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 this period.

    [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]
    The Canadian dollar has declined today, setting USD-CAD up for its first up day in a week, with the pair posting a two-day high at 1.3960. This comes with 0il prices remaining heavy after WTI benchmark futures printed a two-week low at $19.95 late yesterday, with the OPEC++ group's near 10 mln barrel per day output cut, and hints of bigger cuts to dome, doing little to convince crude markets that producers have the will to cut production sufficiently to plug the massive supply/demand gap amid the prevailing lockdowns across many global economies. Overall, we retain a bullish view of USD-CAD.

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