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By XE Market Analysis February 11, 2020 3:33 am
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    XE Market Analysis: Europe - Feb 11, 2020

    The yen has weakened, and the Australian dollar has lifted, reflecting global markets taking a positive view of the ultimate spread and economic impact of the coronavirus outbreak, despite the the World Health Organization warning that the spread of the virus among those who had not been to China could be "the spark that becomes a bigger fire." One popular view in markets is that coronavirus contagion will peak in March, with Chinese growth going to zero m/m in Q1 before rebounding sharply in Q2. There is of course a risk that this markets are mispricing the economic impact of the virus, though central bank stimulus, or the prospect for more, has for now been helping markets look at things from the glass half full perspective. Japanese markets were closed, though the MSCI Asia-Pacific lifted nearly 1%. The narrow trade-weighted USD index lifted to a fresh four-month peak, at 98.91. The dollar, underpinned by the relative robustness of the U.S. economy, continues to register as the strongest main currency on the year-to-date, with gains of 4.5%-5.0% versus the weakest, the Australian and New Zealand dollars. EUR-USD printed a lower low for a fifth consecutive day, this time at 1.0905, which is the lowest level seen since early October last year. The new low was the product of a phase of dollar strength, with euro crosses holding above lows seen yesterday. USD-JPY punched above yesterday's peak in making a high at 109.93, extending the rebound from the six-day low seen Friday at 109.53. Both AUD-USD and AUD-JPY rose to two-day highs, at 0.6719 and 73.86, respectively. Cable hovered around 1.2900-10, holding comfortably above the 10-week low that was seen on Monday at 1.2872. USD-CAD has posted a rare correction, ebbing giving back most of yesterday's gains in making a low at 1.3289. The pair yesterday clocked a four-month high at 1.3329.

    [EUR, USD]
    EUR-USD printed a lower low for a fifth consecutive day, this time at 1.0905, which is the lowest level seen since early October last year. The new low was the product of a phase of dollar strength, with euro crosses holding above lows seen yesterday. The narrow trade-weighted USD index concurrently lifted to a fresh four-month peak, at 98.91. The dollar, underpinned by the relative robustness of the U.S. economy, continues to register as the strongest main currency on the year-to-date, with gains of 4.5%-5.0% versus the weakest, the Australian and New Zealand dollars. EUR-USD pair 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. Fed funds futures are discounting about 82% odds for a 25 bp or greater easing at the last FOMC meeting of the year in December, which is up from the 73% probability being priced in ahead of the U.S. jobs report on Friday.

    [USD, JPY]
    The yen has weakened, reflecting an abatement in the Japanese currency's safe haven premium as global markets take a positive view of the ultimate spread and economic impact of the coronavirus outbreak, despite the the World Health Organization warning that the spread of the virus among those who had not been to China could be "the spark that becomes a bigger fire." One popular view in markets is that coronavirus contagion will peak in March, with Chinese growth going to zero m/m in Q1 before rebounding sharply in Q2. There is of course a risk that this markets are mispricing the economic impact of the virus, though central bank stimulus, or the prospect for more, has for now been helping markets look at things from the glass half full perspective. Japanese markets were closed, though the MSCI Asia-Pacific lifted nearly 1%. USD-JPY punched above yesterday's peak in making a high at 109.93, extending the rebound from the six-day low seen Friday at 109.53.AUD-JPY also rose to a two-day high, at 73.86.

    [GBP, USD]
    Cable has been hovering around the 1.2900-10 mark, holding comfortably above the 10-week low that was seen on Monday at 1.2872. The UK yesterday declared a "serious and imminent threat" to public health following a rise in UK coronavirus cases, while the Telegraph reported "fundamental differences" in post-Brexit fishing rights, which could be a major source of friction, and, according to sources cited in the article, could lead to the collapse of trade talks. On the positive side of the coin, the BoE's recent refrain from easing and data showing a release of pent-up business decision making and spending following the December election have been helping prop up the UK currency. We continue to advice caution with regard to the pound. The government has been signalling divergence from the EU, while the U.S. has been threatening the UK that its decision allow Huawei to participate in building 5G infrastructure may come at the cost of a good trade deal. The UK data calendar this week is highlighted by the release of Q4 GDP, along with December production and trade data (all due today). We expect the first estimate of Q4 growth at 0.0% q/q (median same), and forecast industrial output rising 0.3% m/m while contracting by 1.7% y/y (medians same).

    [USD, CHF]
    EUR-CHF printed a fresh 34-month low at 1.0660. The pronounced losses the cross has been seeing are partly a product of safe-haven demand for the franc, 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 has posted a rare correction, ebbing giving back most of yesterday's gains in making a low at 1.3289. The pair yesterday clocked a four-month high at 1.3329. A basing in oil prices over the last week, coupled with Friday's above-forecast Canadian jobs report, have given the Canadian dollar an underpinning.

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