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By XE Market Analysis April 23, 2020 3:39 am
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    XE Market Analysis: Europe - Apr 23, 2020

    The Australian dollar rebounded out of a post-PMI data dip, aided by a generally risk-on sentiment in Asia-Pacific markets today, which followed the bullish vibe on Wall Street, where another massive U.S. coronavirus relief package and a rebound in oil prices have helped buoy stock markets. Preliminary April PMI data out of Japan and Australian were predictably dismal, with the reports now fully encompassing the coronavirus/lockdown period, though crushing drops in service-sector PMI readings nevertheless raised eyebrows. In Japan, the flash April services PMI plummeted to a 22.8 reading from 33.8 in March, while Australia's services PMI dove to 19.6 from 38.5. Their respective composite PMI readings came in at just 27.8 and 22.4, indicating sharply contracting economic activity. The Aussie dollar dipped in the immediate wake of the data releases, posting a 0.6283 low against the U.S. buck, though the antipodean currency subsequently climbed to a three-day high of 0.6365. A surprisingly robust 29% m/m rise in preliminary March export data out of Australia, which followed weakness in January and February, helped give the Australian currency a boost, as did the the generally bullish session across regional equity markets. The Kiwi dollar also lifted out of a 17-day low versus the U.S. dollar, partly with the New Zealand government pledging more fiscal stimulus, while the oil-correlating Canadian dollar also firmed. USD-CAD tested yesterday's low at 1.4113, remaining heavy after correcting from the 1.4266 high that was seen on Tuesday (when May WTI oil contracts went negative). June WTI oil prices were up 10.3% at $15.20, as of the early London session. The expectation is that diminishing storage space for crude will force oil producers into bigger output cuts. Elsewhere, EUR-USD has remained heavy, edging out a low at 1.0805, nearing yesterday's 16-day low at 1.0802. USD-JPY continued to hold a narrow range in the mid-to-upper 107.00s.

    [EUR, USD]
    EUR-USD has remained heavy, edging out a low at 1.0805, nearing yesterday's 16-day low at 1.0802. The euro has been trading generally softer over the last two days, losing ground to the likes of the pound, the yen and the commodity currencies. Rising peripheral Eurozone government bond yields over Bund yields has reflected the pandemic-crisis era concerns. The EU heads of state will be holding teleconference today on the question of how to finance stimulus measures, and it seems likely that the focus will be on the financing through the EU's budget, rather than the creation of a new debt vehicle. The ECB announced a further temporary easing of collateral rules, that will allow the inclusion of bonds downgraded below investment standards during the crisis. EUR-USD has now drifted to the south of the halfway mark of the volatile range that was seen during the height of the market panic in March. Last month's rapid deployment of monetary stimulus measures by the Fed 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, which has held up for a month now. 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 continued to hold a narrow range in the mid-to-upper 107.00s, lacking direction presently, while the yen has generally traded moderately softer versus most of the other main currencies amid a backdrop of advancing stock markets. Another massive U.S. coronavirus relief package and a rebound in oil prices have helped lift sentiment, reducing the yen's safe-haven premium. On Japan's domestic front, preliminary PMI survey data for April dropped sharply. The manufacturing PMI dove to a 37.8 reading in the April flash estimate, down from 44.2 in March, while the composite PMI plunged to 27.8 from 36.2. As with nearly all dismal data being released these days, the figures are hardly surprising given the global lockdowns. 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]
    The pound has continued to perform like a commodity currency, rising by a similar magnitude to commodity currencies over the last day, which have rebounded from losses seen during the spate of acute risk aversion earlier in the week, with oil and stock markets finding grounds for a rebound. While the UK currency is up by over 8% from the 35-year seen in March, it remains down by an averaged 1.2% against the dollar, euro and yen from week-ago levels, and continues to trade at a notable trade-weighted discount on the year-to-date and from year-ago prices. The combo of the UK's open economy, current account deficit and outsized financial sector, makes the pound vulnerable to risk aversion in global markets, such as the pandemic crisis has wrought. The continued risk of the UK leaving the post-Brexit transition period (which expires at year-end and which maintains access to the EU's customs union and tariff-free single market) without a trade deal is also in the mix, with the UK government having this week vehemently insisted that it will no extend the transition period. We expect, however, that the worse is over for the pound. The global economy should pick up recovery momentum in the months ahead as economies reopen, assuming there will be a sufficient supplies of protective clothing against the coronavirus along with availability of widespread diagnostic testing. Cheap oil prices and massive stimulus measures should help the process.

    [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 oil-correlating Canadian dollar has traded firmer over the last day. USD-CAD tested yesterday's low at 1.4113, remaining heavy after correcting from the 1.4266 high that was seen on Tuesday (when May WTI oil contracts went negative). June WTI oil prices were up 10.3% at $15.20, as of the early London session today. The expectation is that diminishing storage space for crude will force oil producers into bigger output cuts, while reopening economies from lockdown should start to see demand pick up.

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