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By XE Market Analysis February 21, 2020 3:48 am
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    XE Market Analysis: Europe - Feb 21, 2020

    The yen picked up safe have demand after tumbling sharply over the previous two days. Most stock markets rotated lower in Asia after Wall Street closed in the negative. New COVID-19 virus cases were reported in China, South Korea and elsewhere, which kept up the pressure on regional Asian currencies, while Japan's flash PMI survey for February showed a drop in the headline composite reading to 47.0 from 50.1, the steepest contraction in seven years. Australian flash PMI data painted a similar picture. The Australian and Japanese flash PMI reports are earliest releases of PMI data each month, so are widely seen as having portent with regard to upcoming February releases in Asia. Inflation data out of Japan also affirmed a picture of ongoing benign price pressures, with the BoJ's 2% CPI target remaining a distant dream. While Asian currencies remained under pressure, out of the main currencies the biggest losers have been the Australian and New Zealand currencies, with both showing about 0.6% declines versus the strongest, the yen. Note that these currencies are underperforming on the year-to-date, with losses of over 6% against the strongest, the U.S. dollar. AUD-JPY posted a two-day low at 73.64 while AUD-USD printed a fresh 11-year low at 0.6589. NZD-USD hit a new four-month low. USD-JPY, meanwhile, corrected under 111.75 after capping out at a 10-month peak yesterday at 112.22. The dollar itself, while holding firm versus the dollar bloc and many developing world currencies, traded mostly softer versus the other main currencies. EUR-USD lifted slightly, to the 1.0800 area, after yesterday printing a 34-month low at 1.0778. Cable settled above Thursday's three-month low at 1.2849. We expect the haven currencies (dollar, yen, Swiss franc) to remain in ascent over the coming weeks.

    [EUR, USD]
    EUR-USD has lifted slightly, to the 1.0800 area, after yesterday printing a 34-month low at 1.0778. The narrow USD trade-weighted index (DXY) has concurrently come off the boil after yesterday posting a 37-month high at 99.91. While the euro has been on underperforming list of currencies over much of the last couple of weeks amid data showing a sputtering Eurozone economy, the dollar has been underpinned by the relative robustness of the U.S. economy. The U.S. currency continues to register as the strongest main currency on the year-to-date, with gains of over 6% versus the weakest, the Australian and New Zealand dollars. Although the Fed has backed out of its tightening phase after hiking rates three times last year, yield differentials versus the other majors have mostly been holding up, while the dollar has been finding a sporadic underpinning via safe haven demand for Treasuries. EUR-USD has been trending lower since early 2018, dropping from levels near 1.2500.

    [USD, JPY]
    The yen picked up safe have demand after tumbling sharply over the previous two days. Most stock markets rotated lower in Asia after Wall Street closed in the negative. New COVID-19 virus cases were reported in China, South Korea and elsewhere, which kept up the pressure on regional Asian currencies, while Japan's flash PMI survey for February showed a drop in the headline composite reading to 47.0 from 50.1, the steepest contraction in seven years. Australian flash PMI data painted a similar picture. The Australian and Japanese flash PMI reports are earliest releases of PMI data each month, so are widely seen as having portent with regard to upcoming February releases in Asia. Inflation data out of Japan also affirmed a picture of ongoing benign price pressures, with the BoJ's 2% CPI target remaining a distant dream. Trying to call the point of peak contagion, and thereby the peak of economic disruption, is tough, though the consensus seems to be that it will happen in March or April, aided by the arrival of warmer weather in the northern hemisphere (although scientists aren't exactly sure if warm weather will have the same quelling effect as it does on flu and cold viruses). Japan's Q4 GDP data, released on Monday, disappointed, showing a 1.6% q/q contraction versus the median forecast for -0.9%. Q3 data were also revised down, and the figures came amid expectations for a dismal current quarter performance given the impact of measures to contain the virus outbreak in China, Japan, and elsewhere. Fundamentally, the case is clearly a bearish one for the yen, though the dynamics underpinning the currency as a safe haven (Japanese repatriations of overseas assets) should keep the Japanese currency on the list of outperforming currencies.

    [GBP, USD]
    The pound has remained heavy against both the dollar and euro, showing declines of about 1% over the last week against both. Yesterday's above-forecast retail sales data out of the UK, which showed a 0.9% m/m rebound from a 0.5% m/m contraction in December, had little lasting impact, partly as the rolling three-month average fell to the worst level since 2013, and partly with markets more focused on today's release of the UK's preliminary PMI survey data for February, which is expected to show an abatement in activity following January's post-election bounce. Cable breached recent lows on route to a three-month nadir, at 1.2849, while EUR-GBP lifted to eight-day highs. The median forecast for the UK's flash January composite PMI is 52.7, which would mark a deceleration in overall expansion following January's 53.3 outcome.

    [USD, CHF]
    EUR-CHF printed a fresh near-five-year-low yesterday, at 1.0606. The pronounced losses the cross has been seeing of late are largely a product of safe-haven demand for the franc. The U.S. last month added Switzerland to its list of currency manipulators. The 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 rallied above 1.3260 after seeing a three-week low at 1.3212. The Canadian currency will likely remain subject to near-term volatility as long as the coronavirus contagion remains in a state of increasing spread. Canada releases retail sales data today, which are seen rising 0.1% in December after the 0.9% gain in November.

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