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By XE Market Analysis April 30, 2020 4:18 am
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    XE Market Analysis: Europe - Apr 30, 2020

    Narrow ranges have been prevailing in currency markets so far today, despite a rally in global stock markets on news of positive partial results from a trial of Gilead's antiviral Remdesivir drug, which showed it could speed up the recovery from Covid 19. The news saw Wall Street rally and the MSCI Asia-Pacific equity index, having now racked up a weekly gain of over 5%, hit a seven-week high. Some market narratives have also highlighted the rapid development of a potential coronavirus vaccine at Oxford University, which has already started testing a candidate vaccine in humans. South Korea also reported no new coronavirus cases for the first time since late February, when cases in the country peaked. Currency market participants have remained cautious, with the main pairing and cross rates holding narrow ranges. The narrow trade-weighted USD index, which has been weakening in recent sessions, steadied at levels just above 99.50, above the 15-day low seen on Tuesday at 99.45. EUR-USD has posted a sub-30 pip range so far today in the mid 1.0800s, and USD-JPY has plied a sideways range above the six-week low seen yesterday at 106.36. The commodity currencies, recent outperformers, have also been in sideways mode. The ECB policy meeting dominates the remainder of today's calendar, though like the Fed yesterday, the outcome is expected to be relatively uneventful, although an expansion in its QE program is possible. Market participants will be paying close attention to reopening economies given the risk of a second wave of coronavirus infection. The emerging strategy in Europe and other nations appears to be titrating (measuring) the degree of societal openness combined with virus-containing measures (hygiene, social distancing, face masks etc) against the health system's ability to cope with ongoing coronavirus infections, and making adjustments to the degree of openness accordingly, as things develop.

    [EUR, USD]
    EUR-USD has posted a sub-30 pip range so far today in the mid 1.0800s. The ECB policy meeting dominates the remainder of today's calendar, though like the Fed yesterday, the outcome is expected to be relatively uneventful, although an expansion in its QE program is possible. Weekly U.S. Initial jobless claims data, which has been the main data point showing the impact of lockdowns on the world's biggest economy, is also up today. Claims are expected to remain hyper-elevated, though should moderate to 3.0 mln, down from the prior 4.427 mln. Market participants will be paying close attention to reopening economies given the risk of a second wave of coronavirus infection. The emerging strategy in Europe and other nations appears to be titrating (measuring) the degree of societal openness combined with virus-containing measures (hygiene, social distancing, face masks etc) against the health system's ability to cope with ongoing coronavirus infections, and making adjustments to the degree of openness accordingly, as things develop. The sharp narrowing in the dollar's yield advantage that was seen in March, when the Fed reversed all rate hikes it make from late 2015 through to last year, came to a pause in early April, with Treasury/Bund yield differentials having since been holding steady. EUR-USD looks likely to continue to lack a clear directional bias, though risks seem to be skewed to the downside given the political stresses within the EU.

    [USD, JPY]
    USD-JPY has plied a sideways range so far today above the six-week low seen yesterday at 106.36. Narrow ranges have been prevailing in currency markets, despite a rally in global stock markets on news of positive partial results from a trial of Gilead's antiviral Remdesivir drug, which showed it could speed up the recovery from Covid 19. The news saw Wall Street rally and the MSCI Asia-Pacific equity index, having now racked up a weekly gain of over 5%, hit a seven-week high. South Korea also reported no new coronavirus cases for the first time since late February, when cases in the country peaked. Market participants will be paying close attention to reopening economies given the risk of a second wave of coronavirus infection. The BoJ this week delivered on expectations, announcing that JGB purchases can now be unlimited (formerly capped at Y80 tln per year) while also announcing an increase in corporate bond and commercial paper. The yen hasn't been impacted, with move largely symbolic as the central bank's 0% target on the 10-year JGB was being met without the need for unlimited purchases. With the global rate of coronavirus infection in decline, global stock market sentiment has been buoyed by the commencement of a phased reopening in major economies, which should keep the yen on a steady-to-softening track.

    [GBP, USD]
    Cable has settled in a narrow range in the mid 1.2400s. Sterling remains up by an averaged 1% versus the dollar, euro and yen from levels seen at the start of last week, reflecting its correlation with global stock market performance. The UK currency has been apt to perform similar to other "risk-off" currencies, such as commodity currencies, during the pandemic crisis, with the combo of the UK's open economy, current account deficit and outsized financial sector, making the currency sensitive to swings in risk appetite in global markets. With the global rate of coronavirus inflection in decline, and major economies starting a phased reopening (and while the UK remains in lockdown, the UK Treasury is reportedly drawing up measures to "get Britain back to work," including plans for "Covid-secure offices), the tide looks to be shifting, though this assumes that the reopening can be done without causing a second wave of infections. This backdrop should help support the pound, though the continued risk for the UK leaving the post-Brexit transition membership of the EU's single market at the end of the year should curtail upside potential.

    [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 declined to a seventeen-day low at 1.3857, driving by gains in the Canadian dollar, which has been buoyed by another large rally in oil prices. June WTI crude futures were showing a gain of about 14% in making a six-day high at $17.38. WTI benchmark prices are now up 68% from the near $10 low seen earlier in the week. Weekly U.S. inventory data yesterday showed a less-than-expected pick-up in inventories, while data showed a rise in gasoline demand in the U.S., which drove a decline-from-record-highs in gasoline stockpiles in the latest reporting week. This along with an expected forced large global production cutback, due to diminishing storage space, have given the beleaguered oil market an underpinning, which in turn has given a prop to oil-correlating currencies such as the Canadian dollar. The reopening of some economies, and expectations for more reopenings, should also lift crude demand. We are bearish of USD-CAD, anticipating a return to levels around 1.3500 over the coming weeks.

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