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By XE Market Analysis April 16, 2020 4:30 am
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    XE Market Analysis: Europe - Apr 16, 2020

    Relatively narrow ranges have prevailing so far today in currency markets, into early interbank trading in Europe. The dollar has retained a bid, edging out fresh highs against the Australian and Canadian dollars, though remaining shy of the highs seen yesterday against the euro and pound. Stock markets in Asia started off in decline before either paring or more than recovering losses, while S&P 500 futures are showing a gain of nearly 1%, reversing some of the 2.2% decline the cash version of the index saw yesterday. Oil prices have remained heavy, with WTI benchmark futures sinking back under $20.0, keeping yesterday's 21-year low at $19.20 in the frame. In news, Japan is reportedly set to declare a national emergency in the face of a spike in confirmed coronavirus cases, while other countries, including Germany, Denmark, Norway and Austria, are taking first steps to loosen lockdown measures. Australia released better than expected March jobs data, though this was quickly discarded as being a false signal as the data period didn't fully cover the impact of economic lockdowns. Similarly, a 4.3% drop in the UK's BRC retail sales figure in March significantly understated the true current picture as it captured a surge in sales in the couple of weeks leading up to the nation going into lockdown. The U.S. will today release weekly jobless claims for the week to April 11th, a data series that has been best capturing the real-time impact of virus-containing measures in the word's biggest economy. The median forecast is for another big surge, of 4,000k, though even this would mark a deceleration as states catch up with the processing of claims from the late-March to early-April period. We expect a more modest 1,400k rise. The outlook remains uncertain. A phased, partial reopening of economies is starting to happen, but it's looking clear that the road to back to normalcy will be a long one, with a cure or vaccine not likely to be available until next year. Such a backdrop would keep the dollar and yen broadly underpinned while curtailing upside potential of commodity currencies.

    [EUR, USD]
    EUR-USD has remained heavy since posting a one-week low at 1.0856 yesterday. The pair is a little to the south of 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, though the magnitude of package has still disappointed. 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]
    USD-JPY has risen for a second day, and posted a three-day high at 108.08. This has come with Asian stock markets paring losses and with S&P 500 futures rising by nearly 1%. Japan is reportedly set to declare a national emergency in the face of a spike in confirmed coronavirus cases, while other countries, including Germany, Denmark, Norway and Austria, are taking first steps to loosen lockdown measures. The yen will remain apt to outperformance should hopes for a V-shaped recovery from global virus-containing measures fail to be met, which is what we anticipate. A phased, partial reopening of economies is starting to happen, but it's looking clear that the road to back to normalcy will be a long one, with a cure or vaccine not likely to be available until next year.A study from the Harvard School of Public Health this week 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." Such a backdrop would keep the yen broadly underpinned. We continue to anticipate USD-JPY trading at sub-100.00 levels.

    [GBP, USD]
    The pound has steadied after yesterday coming under pressure. Sterling has continued to correlate positively with global stock market direction, fitting the pattern the UK currency has established during the pandemic era. The pound is down by about 6% 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. On the coronavirus front, a government spokesman said details on the formal decision to extend the lockdown another the weeks, to May 7th, will be covered at the daily government press conference today. The prime minister, Boris Johnson, remains in recovery from his brush with COVD 19, with Dominic Raab, the foreign secretary, continuing to deputise. On the Brexit front, the UK's Europe advisor, Davis Frost, met with the EU's chief Brexit negotiator, Michel Barnier, to discuss a timetable for resuming trade negotiations later this month and in May. The official position of the UK government remains that the country will leave its special Brexit-transition membership of the EU's customs union and single market at the end of the year, though with talks having been hobbled by the coronavirus pandemic this its looking increasingly unfeasible.

    [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 edged out a nine-day high at 1.4137, extending the rebound from the recent low at 1.3854. Oil prices have remained heavy, which has been keeping the Canadian dollar on the back foot, with WTI benchmark futures sinking back under $20.0, keeping yesterday's 21-year low at $19.20 in the frame. The IEA warned in its monthly this week that oil demand destruction is too big to offset with supply cuts, forecasting a 29 mln barrel per day drop in April to the lowest levels in 25 years. The agency said there is "no feasible agreement that could cut supply by enough to offset such near-term demand losses," though acknowledged that the near 10 mln bpd output cut agreed by the OPEC++ group of oil producing nations as being a "solid start" by "lowering the peak of the supply overhang and flattening the curve of the build-up in stocks," which should, "help a complex system absorb the worst of this crisis." On the demand side, the IEA said proposals to increase strategic storage from the U.S., China, India and South Korea, could amount to 2 mln bpd of supply being withdrawn from the market over a three month period. Overall, we retain a bullish view of USD-CAD.

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