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By XE Market Analysis April 27, 2020 4:14 am
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    XE Market Analysis: Europe - Apr 27, 2020

    The Australian dollar has outperformed while the U.S. dollar has underperformed amid a backdrop of rising stock markets in Asia. The narrow trade-weighted USD index dropped 0.5% in making a one-week low at 99.86, while EUR-USD concomitantly posted a five-day high at 1.0860, putting in some more distance from the one-month low that was seen last week at 1.0726. Both AUD-USD and NZD-USD rallied as markets cheered moves in both Australia and New Zealand to reopen their economics from coronavirus lockdowns. Both countries stand out as being among the most successful in flattening their infection-rates curves. The Aussie dollar rallied by over 1.2% in making a seven-week high at 0.6470. USD-JPY, meanwhile, ebbed below last week's lows in posting a 12-day low at 107.14, largely reflecting the softer tone in the dollar today. The BoJ, as expected, announced that JGB purchases can now be unlimited (formerly capped at Y80 tln per year) while announcing an increase in corporate bond and commercial paper. The yen wasn't impacted. The move, aside from being anticipated, is largely symbolic, as the central bank's 0% target on the 10-year JGB was being met without the need for unlimited purchases. Elsewhere, the pound was buoyed by news that Prime Minister Johnson will today be returning to work after recovering from his brush with Covid-19. Cable posted a one-week high at 1.2455, while EUR-GBP ebbed to within a couple of pips of last Thursday's low at 0.8708. Ahead this week, the Fed and ECB meet on policy. The former is expected to be a non-event for markets, with no change widely anticipated (having already done so much to respond to the pandemic), while the ECB is likely to extend its debt purchases to include junk bonds.

    [EUR, USD]
    EUR-USD posted a five-day high at 1.0860, putting in some more distance from the one-month low that was seen last week at 1.0726. A broader rotation in the dollar has once again been the dominant directional influencer. This week brings policy meeting at both the Fed and the ECB. The former is expected to be a non-event for markets, with no change widely anticipated (having already done so much to respond to the pandemic), while the ECB is likely to extend its debt purchases to include junk bonds. The outcome of the meetings aren't likely to impart much impact on EUR-USD. In the Eurozone, Italy managed to escape a ratings downgrade with S&P affirming the BBB rating after the close on Friday. Many countries in Europe are also starting a phased reopening of their economies, which is also being seen in some U.S. states. The euro saw some underperformance last week after EU leaders 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. 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. EUR-USD remains to 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. The pairing currently lacks a clear directional bias.

    [USD, JPY]
    USD-JPY has ebbed below last week's lows in posting a 12-day low at 107.14. The move largely reflects a broadly softer tone in the dollar today, which been concomitant with rallying stock markets in Asia. The BoJ, as expected, announced that JGB purchases can now be unlimited (formerly capped at Y80 tln per year) while announcing an increase in corporate bond and commercial paper. The yen hasn't been impacted. The move is largely symbolic as the central bank's 0% target on the 10-year JGB was being met without the need for unlimited purchases. Global markets are likely to remain in a cautious state with regard to the global lockdowns caused by the coronavirus pandemic. Some economies are starting to reopen, but the phased approach will rule out the possibility for there being a v-shaped global economic rebound, while there remain concerns for a second wave of infections. With a vaccine not likely to be available until at last next year, one hope is that diagnostic testing becomes so widespread that it would turn the coronavirus from an invisible entity to a visible one, which would allow effective isolation of those infected. But, most countries remain a long way from that (at bet so far achieving a few dozen tests per 1000 people). The ongoing uncertainty is likely to continue to plague investors. Japanese investors will be apt to keep more capital than otherwise in domestic accounts and assets while this state of affairs persists, while forex market participants are likely to continue to view the yen as a safe haven currency. 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 has been buoyed by news that Prime Minister Johnson will today be returning to work after recovering from his brush with Covid-19. Cable posted a one-week high at 1.2455, while EUR-GBP ebbed to within a couple of pips of last Thursday's low at 0.8708. One view in market narratives is that Johnson's return at the helm will increase the odds for the UK starting a phased reopening of the economy. The pound and UK markets were last week unperturbed by dismal UK PMI and retail sales 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 6% 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]
    The SNB has successfully been putting a cap on the franc, which has seen EUR-CHF in recent weeks skirt along just above the five-year low that was first seen on March 9th at 1.0505 without breaching it. Weekly sight deposit data out of Switzerland has pointed to the extent of SNB franc selling over the pandemic crisis period, which was most acute in March before basing out as global governments and central banks acted with interventions and stimulus packages. A rise in sight deposits (money held by commercial banks) can suggest the francs turning up after being sold by the central bank. Total sight deposits rose by CHF 28.6 bln over the last four weeks, at a diminishing rate (rising by just 3 bln in the last week, through to April 16th) as the demand for the Swiss currency as a safe haven tapered off. The 1.0500 level in EUR-CHF, while not a fixed floor, has clearly been a line in the sand of the SNB. The Swiss central bank has a long history of intervening to either limit of slow the pace of appreciation in its currency, which normally comes during periods of risk aversion in global markets and/or euro underperformance. From 2011 through to 2015, the SNB capped the franc via a 1.2000 floor in EUR-CHF. When the cap was abandoned in January 2015, the franc rallied by 30%, having become unfeasible for the SNB to counter the ECB's expansive monetary policies. A similar circumstance is afoot today, with the ECB maintaining expansive polices following a period of safe haven demand for the franc. In January, the U.S. added Switzerland to its list of currency manipulators. The move seemed a bit harsh 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 argued that Switzerland should pursue a more expansive fiscal policy as a remedy.

    [USD, CAD]
    USD-CAD has ebbed to a 1.4040 low, down on Friday's closing levels just above 1.4100 but so far remaining shy of Friday's low at 1.4021. Global stock markets have opened the week buoyantly as more economies head for a phased reopening from lockdowns, though oil prices have started on a back foot, with oversupply continuing to weigh. June WTI futures were down by over 13% on the day, at $14.68, as of the early London session. The dominant prognosis on oil, however, remains that 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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