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By XE Market Analysis April 22, 2020 4:07 am
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    XE Market Analysis: Europe - Apr 22, 2020

    Outside a jump in the Aussie most currencies have been stable so far today, holding relatively narrow ranges against a backdrop of steadying stock markets. The MSCI Asia-Pacific equity index still edged out a two-month low, though the main indices in China and South Korea managed to recover into the black during their PM sessions. The S&P 500 index bounced by over 1% after the cash version of the index closed on Wall Street yesterday with a 3.1% decline. As for oil prices, the June WTI contract was showing a 7.0% decline as of the early London session, though, at $10.75, remained above yesterday's low at $6.55. The give-away pricing reflects the fact there is increasingly no where to store crude. In time this will force significant production cuts from oil producing nations, with at least some crude importing nations likely to assist in the process by halting imports. The rout in crude prices this week has rattled investors, starkly portending where the global economy is headed in the lockdown era. In currency markets, AUD-USD rallied nearly 1% in making a high at 0.6353. Australian March retail sales surged by a record 8.2% m/m, though is being downplayed as an aberration, having been driven by panicky stockpiling due to the coronavirus outbreak. The pop in the Aussie came well ahead of the data release, with market narratives pointing to profit-taking and short-squeeze motives. Both AUD-USD and AUD-JPY have remained shy of their respective highs from yesterday. Elsewhere, EUR-USD has been plying a narrow range in the mid 1.0800s, and USD-JPY has held a narrow range in the mid-to-upper 107.00s. The Canadian dollar has managed to find a toehold after recent oil-driven declines, causing USD-CAD to dip to a 1.4163 low, though yesterday's low at 1.4111 has remained unchallenged.

    [EUR, USD]
    EUR-USD has been plying a narrow range in the mid 1.0800s so far today, holding above the five-day low that was seen yesterday at 1.0816. The pair 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. This has put a floor under EUR-USD. In the Eurozone, meanwhile, the focus is once again on BTPs (Italian bonds) and the widening of Eurozone spreads, which has prompted some to expect further action from the ECB. The central bank already has more flexibility in its bond buying schedule with the move away from monthly purchase volumes, and with a longer term horizon for the QE program, and we suspect that central bankers are to a certain extent letting spreads move out this week to increase the pressure on European governments to come up with an agreement on stimulus spending at tomorrow's teleconference of heads of states. 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 held a narrow range in the mid-to-upper 107.00s so far today, against a backdrop of steadying stock markets, which has curtailed safe-haven demand for the yen. The MSCI Asia-Pacific equity index still edged out a two-month low, though the main indices in China and South Korea managed to recover into the black during their PM sessions. The S&P 500 index bounced by over 1% after the cash version of the index closed on Wall Street yesterday with a 3.1% decline. As for oil prices, the June WTI contract was showing a 7.0% decline as of the early London session, though, at $10.75, remained above yesterday's low at $6.55. The give-away pricing reflects the fact there is increasingly no where to store crude. In time this will force significant production cuts from oil producing nations, with at least some crude importing nations likely to assist in the process by halting imports. The rout in crude prices this week has rattled investors, starkly portending where the global economy is headed in the lockdown era. Japanese data this week 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., but relevant to most countries) 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]
    Sterling has found its feet after tumbling over the last two days amid a phase of acute risk aversion in global markets. A combo of no-deal Brexit risk and the difficulties the UK has in financing its current account deficit during times of heightened risk aversion had been weighing on the pound, though the UK currency remains comfortably above the major-trend lows it saw in March. Brexit, while overshadowed by the pandemic, remains a concern, or rather the enduring risk that the UK leaves the EU's single market at year-end without a new trade deal with the EU. Negotiations between the UK and EU have recommenced this week via video conferencing. The UK government has continued to repeat that there will not be any extension of the post-Brexit transition, which expires at the end of the year, with the UK's chief negotiator David Frost stating that "we will not ask" to extend the transition, arguing that extending would "simply prolong negotiations, create even more uncertainty, leave liable to pay more to the EU, and keep us bound to evolving EU laws at a time when we need to control our own affairs." The UK has until July 1st to formerly decide on whether to extend the transition period or not.

    [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]
    The Canadian dollar has managed to find a toehold after recent oil-correlating declines. USD-CAD dipped to a 1.4163 low, though yesterday's low at 1.4111 has remained unchallenged so far. As for oil prices, the June WTI contract was showing a 7% decline as of the early London session, though, at $10.75, remained above yesterday's low at $6.55. The give-away pricing reflects the fact there is increasingly no where to store crude. In time this will force significant production cuts from oil producing nations, with at least some crude importing nations likely to assist in the process by halting imports. The rout in crude prices this week has rattled investors, starkly portending where the global economy is headed in the lockdown era. We expect the Canadian dollar to remain directionally biased to the downside, though at some point oil prices are sure to stabilize and rise, which in turn should give the Loonie a prop.

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