Home > XE Currency Blog > XE Market Analysis: Europe - Apr 17, 2020

AD

XE Currency Blog

Topics7368 Posts7413
By XE Market Analysis April 17, 2020 4:01 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5292
    XE Market Analysis: Europe - Apr 17, 2020

    The dollar has traded mostly softer amid a backdrop of risk-back-on sentiment, sparked by U.S. President Trump saying that U.S. states can reopen in a three-staged process, joining a number of other countries that are already amid the first, cautious phase of unlocking their economies. S&P 500 futures rose nearly 4% in printing a three-week high, extending the 0.6% gain the cash version of the index saw yesterday. Asian stocks rallied, too, as have European index futures. Markets overlooked China's GDP plunge of 6.8% y/y, the first contraction on record but hardly surprising given the draconian virus-containing measures taken in the country for much of the first quarter. The narrow trade-weighted USD index ebbed back to 99.90, correcting from yesterday's eight-day high 110.29. EUR-USD concurrently rose to a 1.0881 high, up from yesterday's 10-day low at 1.0817. The dollar also lost some ground to the pound and Swiss franc, while USD-JPY ebbed modestly lower, to levels below 107.70, down from Thursday's four-day high at 108.08. The commodity currencies outperformed, albeit moderately so. AUD-USD printed a two-day high at 0.6383, while USD-CAD edged out a two-day low, at 1.4003. Oil markets haven't felt the prevailing risk-on winds, with sentiment remaining preoccupied by the massive demand/supply imbalance. Front-month WTI futures declined by over 4% in posting a new 21-year low at $18.96. This is telling of the fact that the return to economic normalcy is likely to be a long road.

    [EUR, USD]
    EUR-USD rose to a 1.0881 high, up from yesterday's 10-day low at 1.0817. The rise reflected a bout of broad dollar softness as the U.S. currency declined concomitantly with a rise in global stock markets after U.S. President Trump said that U.S. states can reopen in a three-staged process. The dollar has mostly been trading with an inverse correlation to global stock market direction over the coronavirus crisis period. EUR-USD is at prevailing levels 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. 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." 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 ebbed modestly lower, to levels below 107.70, down from Thursday's four-day high at 108.08. The yen has traded mixed in narrow ranges against other currencies, ebbing versus the commodity currencies while gaining modest ground versus the euro and some other currencies. The Japanese currency has been little impacted by a rotation high in global stock markets, sparked by U.S. President Trump saying that U.S. states can reopen in a three-staged process, joining a number of other countries that are already amid the first, cautious phase of unlocking their economies. This helped markets overlook China's GDP plunge of 6.8% y/y, the first contraction on record but hardly surprising given the draconian virus-containing measures taken in the country for much of the first quarter. There has been lots of talk about a V-shaped recovery, though the reality is that the return to economic normalcy is likely to be a long road. 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]
    Cable has above yesterday's eight-day low at 1.2408, though lower after capping out a 1.2522. Sterling has continued to correlate positively with global stock market direction to quite a large extent, which has been 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 Brexit front, a spokesman for the UK prime minister, who it still recovering from Covid-19, said yesterday that the pandemic has strengthened the need or the UK to be free of EU regulation after 2020, emphasizing that there will not be any extension to the post-Brexit transition, which expires at the end of the year and which maintains UK membership of the EU's customs union and single market (but without voting rights), even if requested by the EU. This comes with negotiations, which have been hobbled by the coronavirus crisis, set to resume next week. The UK has only until July 1st to decide on whether to extend the transition period or not, and the two sides have not so far managed to narrow any of their differences on key sticking points. The general view among political pundits is that the UK is hoping the tight timetable, and tactics such as so-far failing to product a draft text on issues such a fisheries, will put pressure on the EU during negotiations. Contrary to the expectation in Brussels, and of many onlookers, the UK government is continuing to play hardball despite the disrupting impact of the pandemic, indicating that it is willing to leave the EU without a deal -- i.e. pull the trigger on the hard Brexit option. The risk is that the EU will call its bluff, as the economic consequences would be harder felt in the UK than in the EU. Tipping out of the transition period without a deal would result in the UK economy trading on less favourable WTO terms. The Centre for Economic Performance estimates that such a shift would reduce UK trade with the EU by 40% over 10 years, while also causing slowing in investment and productivity growth.

    [USD, CHF]
    EUR-CHF yesterday tested the five-year low that was first 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 should keep EUR-CHF directionally biased to the downside. 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 two-day low, at 1.4003. The Canadian dollar has been modest outperformance since U.S. President Trump said that U.S. states can reopen in a three-staged process, joining a number of other countries that are already amid the first, cautious phase of unlocking their economies. This sparked a rally on global stock markets. But, oil markets haven't felt the good vibes, with sentiment remaining preoccupied by the massive demand/supply imbalance. Front-month WTI futures declined by over 4% in posting a new 21-year low at $18.96. This is telling of the fact that the return to economic normalcy is likely to be a long road. We retain a bullish view of USD-CAD.

    Paste link in email or IM