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By XE Market Analysis February 6, 2020 3:56 am
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    XE Market Analysis: Europe - Feb 06, 2020

    The yen posted fresh lows versus the dollar and Australian dollar, among some other currencies, as global stock markets continued to rally at an accelerated pace. China announced it will halve tariffs on some U.S. imports, in accordance with the phase-1 trade deal. Reports of progress in finding a vaccine against the coronavirus has been a supportive factor for stocks, too, over the last day, although any vaccine wouldn't be ready until after about a year, such is the nature of development for vaccinations. The liquidity and restrictions on share selling in China, plus the efforts across the Asia region and globally to stop contagion of the coronavirus, are also in the mix of factors stocking investor optimism, although it's clear that "peak spread" is some indeterminate way off. Among the main currencies, USD-JPY rose for a fourth consecutive day in making a 15-day peak at 109.98, further extending the rebound from the four-week low seen last Friday at 108.30. Yen crosses were steady-to-buoyant. AUD-JPY, a forex market proxy on China, for instance, posted an 10-day high. AUD-USD held within its Wednesday range, below yesterday's eight-day high at 0.6774. Positioning in Australia's cash rate futures are implying a 9% probability for the RBA cutting the cash rate 25 bp at its March policy meeting, down from 13% yesterday and 33% on Tuesday. Elsewhere, EUR-USD plied a narrow range fractionally above Wednesday's 1.0993 eight-day low, and the two-month low seen last Wednesday at 1.0992. Cable held steady in the upper 1.2900s, above yesterday's low at 1.2956 and above the seven-week low at 1.2941 that was seen on Tuesday. USD-CAD, like yesterday, remained underpinned in the upper 1.3200s, but held below the two-month high seen on Monday at 1.3303. Oil prices are up by 4.4% over the last two days.

    [EUR, USD]
    EUR-USD plied a narrow range fractionally above Wednesday's 1.0993 eight-day low, and the two-month low seen last Wednesday at 1.0992. The pair remains above the two-month low at 1.0992, which was clocked last Wednesday. Aside from the prevailing phase of euro softness, 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 3.9% versus the Aussie dollar, and a little more than this versus the New Zealand dollar, which are the joint weakest, and is showing a 1.2% gain on the yen). 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 74% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    The yen posted fresh lows versus the dollar and Australian dollar, among some other currencies, as global stock markets continued to rally at an accelerated pace. China announced it will halve tariffs on some U.S. imports, in accordance with the phase-1 trade deal. Reports of progress in finding a vaccine against the coronavirus has been a supportive factor for stocks, too, over the last day, although any vaccine wouldn't be ready until after about a year, such is the nature of development for vaccinations. The liquidity and restrictions on share selling in China, plus the efforts across the Asia region and globally to stop contagion of the coronavirus, are also in the mix of factors stocking investor optimism, although it's clear that "peak spread" is some indeterminate way off. USD-JPY rose for a fourth consecutive day in making a 15-day peak at 109.98, further extending the rebound from the four-week low seen last Friday at 108.30. Yen crosses were steady-to-buoyant. AUD-JPY, a forex market proxy on China, for instance, posted an 10-day high. Ratings agency Moody's suggested that while the coronavirus outbreak will weigh on discretionary consumer spending on transport, retail, tourism, and entertainment, that the Chinese government still has the financial means to absorb the shock.

    [GBP, USD]
    Cable has held steady in the upper 1.2900s, above yesterday's low at 1.2956 and above the seven-week low at 1.2941 that was seen on Tuesday. There was notable price action yesterday, with the pound coming under quite hefty pressure to more than reverse gains seen following the unexpected upward revision in final January PMI data out of the UK. The PMI data showed an unleashing of delayed decision making and pent-up demand in the wake of the general election. The price action in the pound, however, was telling of an overall bearish assessment of where Breixt is headed. This follows UK Prime Minister Johnson's keynote speech on Monday where he made clear that his government is not looking for close regulatory alignment with the EU. He stated that the government is aiming for a "Canada-style" free trade agreement with the EU, with an "Australian-style deal" being the backup -- which is a cosy way of selling the possibility of a no-deal Brexit at the end of 2020. With this, Johnson shifted the goalposts, having pledged during his recent election campaign that there was "zero chance" for a no deal Brexit at the end of 2020. The market consensus is that a no-deal Brexit, and the shift to trading on WTO terms that would entail, would be economically damaging to the UK. A Canadian-style deal with the EU, meanwhile, is also a concern for the service sector, as such a deal covers goods and not services. The UK runs a significant trade surplus in services, much of which is accounted for by the EU.

    [USD, CHF]
    The Swiss franc has ebbed back over the last several days after rallying strongly recently, which last week produced 3-month highs against the euro. The gains were 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, like yesterday, remained underpinned in the upper 1.3200s, but remained below the two-month high seen on Monday at 1.3303. Oil prices are up by over 4% over the last two days, which has given the Canadian dollar a prop. After a 20%-plus dive in oil prices in little more than a month, expectations for OPEC to trim output quotas have been strengthening, due to the demand erosion that the coronavirus and measures to contain its spread have been causing.

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