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By XE Market Analysis April 21, 2020 3:36 am
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    XE Market Analysis: Europe - Apr 21, 2020

    The dollar and yen have traded firmer against most other currencies amid a risk-off environment. Asia stock markets have seen their biggest single-day sell-off in a month, with the MSCI Asia-Pacific index losing over 2%. S&P 500 futures were showing a loss of 0.7% after the cash version of the index closed out yesterday 1.8% for the worse, though price action has been whippy in the overnight session. Yesterday's oil rout spooked investors, symbolizing the impact of global lockdowns, and while some economies are starting to reopen from lockdowns (including hard-hit Italy, which will start a gradual reopening from May 4th), the road back to normalcy is going to be a long one. The World Health Organisation warned of there being a second wave of infections as economies reopen. Amid this backdrop, the narrow trade-weighted USD index printed a four-day high at 100.23. EUR-USD concurrently ebbed to a four-day low at 1.0826. The yen has outperformed, only moderately against the dollar, but more so against the euro and even more versus the underperforming commodity currencies. USD-JPY posted a four-day low at 107.40, while EUR-JPY forayed into 19-day low territory, and AUD-JPY, a forex market barometer of risk appetite in global markets, along with being a currency proxy of China, declined by some 0.7% in making a five-day low at 67.58. AUD-USD printed a four-day low at 0.6284. Oil prices have found a footing after the rout in the May WTI contract yesterday. June WTI crude was showing a 3% intraday gain as of the early London session, at $21.02. The near lack of storage appears to be putting a physical break on oversupply, with U.S. President Trump, for instance, is reportedly considering halting Saudi oil imports. This has helped USD-CAD steady after rallying yesterday, though the pair has still managed to edge out a five-day high at 1.4178.

    [EUR, USD]
    EUR-USD ebbed to a four-day low at 1.0826, with the pair driven once again by a broader move in the dollar. EUR-USD continues to trade 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]
    The yen has outperformed, only moderately against the dollar, but more so against the euro and even more versus the underperforming commodity currencies amid a backdrop of sinking global equity markets. Yesterday's oil rout spooked investors, symbolising the impact of global lockdowns. USD-JPY printed a four-day low at 107.40, while EUR-JPY forayed into 19-day low territory. AUD-JPY, a forex market barometer of risk appetite in global markets, and a currency proxy of China, declined by some 0.7% in making a five-day low at 67.58. Japanese data yesterday 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. Regardless of Japanese fundamentals, we expect the yen will remain prone to outperformance during any further phases of acute risk-off positioning, which 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 edged out an 11-day low at 1.2390 on the back of a generally firmer dollar, though the pair looks to be amid a third consecutive week of trading without an overall clear directional bias. Post-Brexit negotiations are recommencing this week via video conferencing, though market participants remain too preoccupied with the pandemic and dealing with the economic devastation caused by global lockdowns than they are about Brexit matters. The UK government last week signalled its commitment to avoid any extension of 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. The UK has until July 1st to formerly decide on whether to extend the transition period or not (a delay of up to two years is provisioned for in existing arrangements), and the two sides have not so far managed to narrow any of their differences on key sticking points. As for the coronavirus situation in the UK, the country has emerged as being relatively hard hit, as have the other big European countries. The country is now amid its fourth week in lockdown, which was extended last week through to May 7th. As elsewhere, and already being seen in the likes of Scandinavia, Germany and Austria, a partial reopening is on the cards in May, or at least June, pending on their being clear curve flattening in confirmed cases, along with sufficient supplies of protective clothing and availability of widespread diagnostic testing.

    [USD, CHF]
    EUR-CHF has remained heavy after last week testing 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 five-day high at 1.4178, despite oil prices managing to scrambled out a toehold after yesterday's rout in the expiring May WTI contract yesterday. June WTI crude was showing a 3% intraday gain as of the early London session today, at $21.02. The near lack of storage appears to be putting a physical break on oversupply, with U.S. President Trump, for instance, is reportedly considering halting Saudi oil imports.

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