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By XE Market Analysis February 4, 2020 3:53 am
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    XE Market Analysis: Europe - Feb 04, 2020

    The dollar has traded mostly firmer and the yen mostly softer amid a backdrop of rebounding global equity markets. China's CSI equity index managed a 2.6% gain, recouping about a third of the steep, post-holiday losses seen yesterday. European and U.S. index futures are showing gains of around 0.4-0-5%, too, which follows a positive close on Wall Street yesterday. Stimulus efforts by Beijing, coupled with widespread efforts to stem the contagion of the coronavirus, along with unexpectedly solid U.S. January manufacturing data, have collectively been feeding a revival in investor spirits. China's state-backed Securities Times published an op-ed calling on investors not to panic, which followed China's securities regulator yesterday limiting short selling and preventing mutual fund managers from selling shares unless for investor redemptions. The PBoC also hit the stimulus taps yesterday, and markets are expecting more. The coronavirus remains a concern that's hard to quantify, though there are narratives suspecting overreaction, as the death toll, which is now at 427, and reported cases remain a tiny fraction of those metrics for "regular" flu so far in the northern hemisphere winter. As with flu, the vast majority of people having been afflicted with the coronavirus make a full recovery, though there are worries that the virus could mutate into something worse. Among the major currencies, USD-JPY lifted to a two-day high at 108.96. EUR-USD ebbed, though has so far remained above its 1.1035 low from yesterday. The Australian dollar rallied after the RBA refrained from cutting its cash rate. Australian cash futures had been implying about a 20% probability for a 25 bp cut heading into today's policy review. AUD-USD gained about 0.5% in making a two-day high at 0.6726. Sterling took another turn lower, hitting a six-week low at 1.2941 versus the dollar. UK Prime Minister Johnson yesterday made clear that his government is not looking for close regulatory alignment with the EU, which has been weighing on the pound. USD-CAD steadied after hitting a two-month high yesterday at 1.3303, which was seen as oil prices dove to fresh trend lows.

    [EUR, USD]
    EUR-USD ebbed, though has so far remained above its 1.1035 low from yesterday, which was seen following a dollar rally on unexpectedly solid U.S. January manufacturing data.The pair remains above the two-month low at 1.0992, which was seen last Wednesday. Recent declines in EUR-USD have in part been a reflection of the dollar having been outperforming the common currency in the context of rising risk aversion in global markets. The U.S. currency is registering as the strongest of the main currencies on the year-to-date, reflecting international demand for Treasuries (the dollar is up by 4.2% versus the Aussie dollar, which is the weakest, and is showing a 0.4% gain on the yen, which is the second strongest). Bigger picture, EUR-USD has been trending lower since early 2018, dropping from levels near 1.2500 and posting a 32-month low at 1.0879 in early October, the current nadir of the trend. Momentum has faded, however, with the Fed having backed out of its tightening phase after hiking rates three times last year. The central bank has since been engaged in capping the repo rate, and Fed funds futures are discounting about 83% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    USD-JPY lifted to a two-day high at 108.96 amid a backdrop of rebounding global equity markets, which has seen some of the yen's safe haven premium unwind. China's CSI equity index managed a 2.6% gain today, recouping about a third of the steep, post-holiday losses seen yesterday. European and U.S. index futures were showing gains of around 0.4-0-5%, too, which follows a positive close on Wall Street yesterday. Stimulus efforts by Beijing, coupled with widespread efforts to stem the contagion of the coronavirus, along with unexpectedly solid U.S. January manufacturing data, have collectively been feeding a revival in investor spirits. China's state-backed Securities Times published an op-ed calling on investors not to panic, which followed China's securities regulator yesterday limiting short selling and preventing mutual fund managers from selling shares unless for investor redemptions. The PBoC also hit the stimulus taps yesterday, and markets are expecting more. The coronavirus remains a concern that's hard to quantify, though there are narratives suspecting overreaction, as the death toll, which is now at 427, and reported cases remain a tiny fraction of those metrics for "regular" flu so far in the northern hemisphere winter. As with flu, the vast majority of people having been afflicted with the coronavirus make a full recovery, though there are worries that the virus could mutate into something worse. The travel restrictions in Asia will, regardless, have an economic impact across China and Asia. Hyundai will reportedly stop production lines in South Korea this week due to supply chain disruptions in China. Ratings agency Moody's suggested that while the coronavirus outbreak will weigh on discretionary consumer spending on transport, retail, tourism, and entertainment, it argued that the Chinese government has the financial means to absorb the shock.

    [GBP, USD]
    Sterling took another turn lower, hitting a six-week low at 1.2941 versus the dollar. UK Prime Minister Johnson yesterday made clear that his government is not looking for close regulatory alignment with the EU, which has been weighing on the pound. Johnson said in a keynote speech yesterday -- the first business day after the UK legally exited from the EU -- that the UK will essentially be looking to diverge from EU regulation by stating that the government is looking for either a Canada-style free trade deal with the EU or an Australian one. Since there is no trade deal between the EU and Australia, Johnson's reference to an Australian-style deal is a euphemism for "no deal" -- that is, the UK leaving the EU transition period (which lasts until the end of 2020) without a new trade deal, and then proceeding with trade on WTO terms. In point of fact, the EU and Australia have been in trade talks, but so far it hasn't happened, with one concern cited by the EU being that one hormone injected into Australian beef is deemed by EU scientists to be carcinogenic. This has already emerged as a controversial topic in the UK given the intentions to strike a trading deal with Australia. Johnson said in his speech that any trade deals will rely on science -- and not "bogus science," though it was not clear if here was taking a jab at EU scientists. Johnson's embrace of an "Australian-style deal" as a possibility suggests that he has shifted the goalposts, having formerly pledged, during the recent election campaign, that there was "zero chance" for a no deal Brexit at the end of 2020. The EU's chief Brexit negotiator, Barnier, said that the EU was not looking for regulatory "alignment" from the UK, but warned that the EU "would be very demanding" with regarding to the "quality and credibility" of the "level playing field mechanism." This is a shot across the UK bows, signalling that there will be consequences if the UK attempts go the low-regulation, low tax (a la Singapore) route. The market view is that a no-deal Brexit, and the shift to trading on WTO terms that would entail, would be economically damaging to the UK. About half of UK exports go to the EU.

    [USD, CHF]
    The Swiss franc has been rallying strongly recently, last week hitting 3-month highs against the euro. The gains have been partly a product of safe-haven demand, and partly as a lasting consequence of the surprising decision by the U.S. to add Switzerland to its list of currency manipulators last month. The U.S. 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 steadied after hitting a two-month high yesterday at 1.3303, which was seen as oil prices dove to fresh trend lows. The impact of the spreading coronavirus, and expectations on Asian and global growth, and demand erosion for oil, has been weighing on the Canadian currency, given the exposure of the Canadian economy to oil prices. The WTI oil benchmark has dropped by over 20% over the last month. We advise trend following USD-CAD in the anticipation that the worst has yet to be seen with regard to the coronavirus.

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