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By XE Market Analysis February 7, 2020 3:57 am
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    XE Market Analysis: Europe - Feb 07, 2020

    The dollar has remained broadly underpinned following the round of solid U.S. data releases on Thursday, including upbeat consumer confidence and a stabilization in manufacturing after passage of the trade deals. This along with and massive liquidity injections from China helped boost equities, and sent Wall Street and European markets to record highs yesterday, despite ongoing concerns about the coronavirus. The narrow trade-weighted USD index (DXY) yesterday hit a four-month high at 98.57 in what is now the biggest weekly dollar gain the index has registered since August last year. The dollar has since settled around the 98.50 mark. EUR-USD has remained heavy after posting a four-month low yesterday at 1.0964. USD-JPY edged out a 16-day high at 110.02, contrasting to yen crosses, which mostly posted moderate losses. Cable printed a fresh six-week low at 1.2921 during the New York afternoon session, and has since remained heavy. AUD-USD posted a three-day low at 0.6711. USD-CAD remained buoyant, though so far shy of the two-month high seen yesterday at 1.3309. The dollar has extended its position as the strongest major currency of the year-to-date, with a 4.4% gain versus both the Australian and New Zealand dollars, the joint weakest, a 1.2% rise versus the yen and a 2.2% advance against the euro. Yield differentials have been driving the latest bid for dollars, replacing what had until recently been a safe-haven bid for dollars. Positioning in Fed fund futures presently imply a 10% chance for the Fed cutting interest rates by 25 bp at its March FOMC meeting, down from the 27% probability being factored a week ago.

    [EUR, USD]
    EUR-USD has remained heavy after posting a four-month low yesterday at 1.0964. The new lows reflects a new phase of dollar demand following the round of solid U.S. data releases on Thursday, including upbeat consumer confidence and a stabilization in manufacturing after passage of the trade deals. This along with and massive liquidity injections from China helped boost equities, and sent Wall Street and European markets to record highs yesterday, despite ongoing concerns about the coronavirus. The narrow trade-weighted USD index (DXY) hit a four-month high at 98.57 in what is now the biggest weekly dollar gain the index has registered since August last year. Positioning in Fed fund futures presently imply a 10% chance for the Fed cutting interest rates by 25 bp at its March FOMC meeting, down from the 27% probability being factored a week ago.

    [USD, JPY]
    USD-JPY edged out a 16-day high at 110.02, contrasting to yen crosses, which mostly posted moderate losses. Equity markets in the U.S. and Europe scaled to new record highs yesterday, while Asian markets mostly remained buoyant, although with a measure of sputtering price action amid ongoing concerns about the coronavirus and the economic consequences of the draconian measures being taken to stop its spread. The yen has in recent sessions traded lower amid an unwinding in its safe-haven premium. China yesterday 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, this week, 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 that have been stoking investor optimism, although it's clear that "peak spread" is some indeterminate way off. 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 printed a fresh six-week low at 1.2921 during the New York afternoon session on Thursday, and has since remained heavy. The pound has been performing better against the euro and yen, among other currencies. Brexit related concerns are likely to remain a bearish headwind on the UK currency, while the National Institute of Economic and Social Research (NIESR), the UK's oldest think tank, said yesterday that the government's economic plan, which is focused on fiscal stimulus to revamp the UK's infrastructure, will be stymied by the prevailing lack of spare capacity in the economy, which would risk driving up inflation and forcing higher interest rates. The NISER said that any positive impact on the economy from higher spending would be less than 0.5% of GDP over the long run, compared with an estimated 3-4% cost of Brexit, forecasting that the government would fall well short of achieving its growth target of 2.8% per year. The Bank of England last week warned that productivity in the UK would be negatively affected by Brexit due to higher trade barriers. The BoE stated that the UK could grow only by 1.1% on average until 2023 without driving up inflation. Such forecasts, coupled with UK Prime Minister Johnson having made clear during a keynote speech this week that his government is not looking for close regulatory alignment with the EU, have been weighing on the pound, which is down by over 1% from week-ago levels versus the dollar, and by nearly 2.4% on the year-to-date.

    [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 printed a one-month high at 1.3309. Both yield differentials and oil prices have been supporting the pairing, the former working in the U.S. dollar's favour following a solid round of U.S. data releases on Thursday, and weakness in the latter serving to undermine the Canadian currency.

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