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By XE Market Analysis April 20, 2020 4:04 am
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    XE Market Analysis: Europe - Apr 20, 2020

    Oil currencies have come under pressure concomitantly with crude prices hitting 21-year lows, while most dollar pairings and associated crosses have been trading in comparatively narrow ranges amid a backdrop of sputtering stock markets. Most of the main Asian equity indices are showing losses of varying degrees, though Chines markets bucked the trend with moderate gains, while S&P 500 futures are down 0.4%. May contract WTI crude oil futures were showing an intraday loss of 18% in hitting a low at $14.47, which is the lowest WTI benchmark prices have traded since March 1999. May futures expire tomorrow, while the June contract posted a low at $23.75. The Oxford Institute for Energy forecast China's annual demand for oil will fall by between 100k and 250k barrels per day in what would be the first contraction since records began in 1990, which chimes with OPEC saying last week that global oil demand is set to fall to just 20 mln barrels per day, the lowest since 1989. In forex markets, the oil-correlating Canadian dollar is the weakest of the main currencies we track, off lows at the time of writing but still showing a loss of 0.6% to the U.S. dollar, which marginally registers as the firmest currency on the day. USD-CAD printed a high at 1.4103, up on Friday's low at 1.3998 but so far remaining shy of its Friday high, at 1.4119. EUR-USD, meanwhile, plied a narrow range in the mid 1.0800s, holding well within Friday's range. USD-JPY traded moderately firmer, to an intraday peak of 107.94, but remained shy of the Friday high at 108.08. The likes of Cable and AUD-USD, and other pairings, also remained within their respective Friday ranges. On the coronavirus front, New Zealand said that it will be loosening lockdown restrictions from next week, while President Trump said that a Congressional deal to provide relief money for small businesses may come later today.

    [EUR, USD]
    EUR-USD has been plying a narrow range in the mid 1.0800s, holding well within Friday's range. The pair is trading 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, having satiated what had been a surge in demand for the world's reserve currency . 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 traded moderately firmer, to an intraday peak of 107.94, but has so far remained shy of the Friday high at 108.08. Japanese data showed a below-forecast 11.7% y/y drop in March exports, which racked up the 16th consecutive y/y decline. Imports contracted by 5.0% y/y. The net impact was a massive shrinkage in Japan's trade surplus, which totalled just Y4.9 bln, down from 110.8 bln in February and well off the median forecast for 459.9 bln. The yen will remain prone to outperformance during any further phases of acute risk-off positioning, which we think remains a risk as expectations that loosening lockdown restrictions may be exceeding the potential for a V-shaped recovery. 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 last week highlighted that (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 continue to anticipate USD-JPY trading at sub-100.00 levels.

    [GBP, USD]
    Cable has settled in the mid 1.2400s, above last Thursday's elven-day low at 1.2408. The UK currency has for the most part been correlating positively during the prevailing pandemic era, while the risk of a hard no-deal Brexit has re-emerged as a concern for the pound after a spokesman for the UK prime minister said last week that, 1, the pandemic has strengthened the need or the UK to be free of EU regulation after 2020, and 2, 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, due to resume this 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 UK government is continuing to play hardball despite the disrupting impact of the pandemic. 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 last week 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 printed a high at 1.4103, up on Friday's low at 1.3998 but so far remaining shy of its Friday high, at 1.4119. Oil prices, to which the Canadian dollar correlatives with, remain under pressure. May contract WTI crude oil futures were showing an intraday loss of 18% in hitting a low at $14.47, which is the lowest WTI benchmark prices have traded since March 1999. May futures expire tomorrow, while the June contract posted a low at $23.75. The Oxford Institute for Energy forecast China's annual demand for oil will fall by between 100k and 250k barrels per day in what would be the first contraction since records began in 1990, which chimes with OPEC saying last week that global oil demand is set to fall to just 20 mln barrels per day, the lowest since 1989. Given the massive demand/supply imbalance in oil markets, and after the IEA said last week in its monthly report, that there is "no feasible agreement that could cut supply by enough to offset such near-term demand losses," we retain a bullish view of USD-CAD.

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