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By XE Market Analysis April 24, 2020 4:10 am
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    XE Market Analysis: Europe - Apr 24, 2020

    The dollar has traded firmer amid a backdrop of souring risk appetite after EU leaders yesterday signed-off the finance minister's agreement on immediate crisis measures but failed to come up with a deal on a trillion Eurozone recovery fund. This, along with news in the U.S. that Gilead Sciences Inc's antiviral drug Remdesivir had failed to help severely ill Covid-19 patients in its first clinical trial, have weighed on global stock markets, with Europe's Stoxx 50 futures underperforming with losses over over 2.2%. The narrow trade-weighted USD index rose 0.4% in posting a 17-day high at 100.79, while EUR-USD, now amid its fourth consecutive day of lower daily lows, dropped nearly 0.5% in printing a fresh one-month low at 1.0728. Euro underperformance aided EUR-JPY to a three-year low at 115.54. Regarding the Eurozone recovery fund, while leaders made some progress in their meeting yesterday, it was not what markets liked as the focus was on a temporary facility and loans, rather than perpetual Eurobonds and joint financing. Fault lines between southern and eastern European states also emerged. While the euro has declined, peripheral Eurozone bond markets have underperformed. Elsewhere, commodity currencies have ebbed after rising over the last couple of days. USD-JPY has for a fifth consecutive day held a narrow range in the mid 107.00s, lacking direction presently, while the yen has generally traded moderately firmer today versus most of the other main currencies amid the backdrop of sputtering stock markets. Japan's finance minister Aso today said that the BoJ hasn't reached a decision on unlimited bond buying. The Nikkei newspaper yesterday reported that the central bank is discussing unlimited government bond purchases. The BoJ meets on Monday.

    [EUR, USD]
    The euro has underperformed after EU leaders yesterday failed to come up with a deal on a trillion Eurozone recovery fund, although signing-off the finance minister's agreement on immediate crisis measures. EUR-USD, now amid its fourth consecutive day of lower daily lows, dropped nearly 0.5% in printing a fresh one-month low at 1.0728. Euro underperformance aided EUR-JPY to a three-year low at 115.54. Regarding the Eurozone recovery fund, while leaders made some progress in their meeting yesterday, it was not what markets liked as the focus was on a temporary facility and loans, rather than perpetual Eurobonds and joint financing. Fault lines between southern and eastern European states also emerged. While the euro has declined, peripheral Eurozone bond markets have underperformed. EUR-USD has been falling further the south of the halfway mark of the volatile range that was seen during the height of the market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. A re-test of the three-year low at 1.0637 now looks likely.

    [USD, JPY]
    USD-JPY has for a fifth consecutive day held a narrow range in the mid 107.00s, lacking direction presently, while the yen has generally traded moderately firmer today versus most of the other main currencies amid a backdrop of sputtering stock markets. Japan's finance minister Aso today said that the BoJ hasn't reached a decision on unlimited bond buying. The Nikkei newspaper yesterday reported that the BoJ is discussing unlimited government bond purchases (the current JGB limit for the central bank is 80 tln per year), while keeping the 10-year target at 0%. Further clarity is needed as the BoJ has been meeting the 0% target without the need for unlimited JGB purchases. The Nikkei story also reported that the central bank may also double purchase targets for commercial paper and corporate bonds. The BoJ meet on Monday for a shortened one-day gathering. It's unlikely that such a move would drive the yen lower, at least in a sustained way, while global markets remain in a cautious state with regard to the global lockdowns caused by the coronavirus pandemic. Japanese investors will be apt to keep more capital than otherwise in domestic accounts and assets while uncertainty about the global outlook persists, while forex market participants are likely to continue to view the yen as a safe haven currency. We have been arguing that expectations about the moves toward 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 recent study from the Harvard School of Public Health 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 and UK markets have been unperturbed by dismal UK PMI (yesterday) and retail sales (today) data, having long since become well braced for the dismal run of data that's only now starting to show the full impact of the global lockdowns. The UK preliminary April composite PMI plummeted to a reading of just 12.9, down from 36.0 in March. One ray of light came from business optimism for the year ahead, which lifted off its record low that was seen in March, and which likely reflected expectations for a phased reopening of the economy. The data should help sharpen government attention about the trade-off between containing the coronavirus and economic prosperity. How to reopen economies before there is a cure or vaccine without risking a second wave of coronavirus infections is the major question, and current thinking is that it will take there being, other than social distancing, sufficient supplies of protective clothing along with availability of widespread diagnostic testing, which could take another month or two to realise. The pound is up by over 8% from the 35-year seen in March, but is down by 7% on the year-to-date. The combo of the UK's open economy, current account deficit and outsized financial sector, has meant that the pound has been vulnerable to risk aversion in global markets.

    [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 has settled near 1.4100 after lifting out of yesterday's one-week low at 1.3998, which was the culmination of a correction from the 1.4266 high that was seen on Tuesday (after May WTI oil contracts went negative). June WTI oil prices have lifted to around $16-$18 levels, with crude markets having found a toehold. 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. This in turn has weakened bearish arguments about the Canadian dollar. The currency correlates closely with oil prices, as oil exports account for nearly 25% of Canadian GDP (2018 data).

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