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By XE Market Analysis February 25, 2020 4:23 am
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    XE Market Analysis: Europe - Feb 25, 2020

    Markets have have found a more even keel amid a hiatus from the virus panic. Some market commentaries point to a Wall Street Journal report on progress in developing a vaccine to COVID-19 virus. There is also remains reasons for optimism. For one, comparisons with regular flu provides perspective: Total deaths from COVID-19 stand at 2,619 worldwide (according to the John Hopkins monitor), which compares to the over 10k of deaths caused by regular flu in the U.S. alone so far in the 2019-20 season, and 180k hospitalizations. Also, as we reported yesterday, there is scientific conjecture that the virus will naturally weaken a it spreads (a lowering in the "zoonotic force of inflection" or weakening in the rate of transmissibility, as is typical in virus outbreaks), which is highlighted by a report in the Lancet Journal, with April seen as likely to mark the point of peak contagion. This backdrop, coupled with news of fresh contagion-stemming measures and preparations being taken around the globe, including in Europe and the U.S., helped stock markets in Asia rebound from early selling pressure. Japan was an exception, with markets there playing catch up after reopening form a holiday yesterday. In forex markets, the dollar bloc and developing world currencies found a footing, while the safe haven the dollar, yen and Swiss franc traded softer. The narrow USD index (DXY) printed an eight-day low at 99.11, extending a correction from the 34-month high seen last week at 99.91. EUR-USD settled around 1.0850, remaining buoyant after yesterday printing a 12-day high at 1.0872. AUD-USD steadied above 11-year lows. USD-JPY settled above the six-day low seen yesterday at 110.33.

    [EUR, USD]
    EUR-USD settled around 1.0850, remaining buoyant after yesterday printing a 12-day high at 1.0872. The price action fits with that of the narrow trade-weighted USD index (DXY), which yesterday printed an eight-day low at 99.11, extending a correction from the 34-month high seen last week at 99.91. We still anticipate a revisit of the 34-month low at 1.0778, which was seen last Thursday. The sharp rise in COVID-19 cases in Italy comes with the euro having been on underperforming list of currencies over much of the last several weeks amid data showing a sputtering Eurozone economy (notwithstanding improvement in February PMI data). The dollar, meanwhile, 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 around 8% 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]
    USD-JPY settled above the six-day low seen yesterday at 110.33, and most yen crosses have traded firmer as markets pare back the Japanese currency's safe haven premium. Sentiment has become more even keeled amid a hiatus from the virus panic. Some market commentaries point to a Wall Street Journal report on progress in developing a vaccine to COVID-19 virus. There is also remains reasons for optimism. For one, comparisons with regular flu provides perspective: Total deaths from COVID-19 stand at 2,619 worldwide (according to the John Hopkins monitor), which compares to the over 10k of deaths caused by regular flu in the U.S. alone so far in the 2019-20 season, and 180k hospitalizations. Also, as we reported yesterday, there is scientific conjecture that the virus will naturally weaken a it spreads (a lowering in the "zoonotic force of inflection" or weakening in the rate of transmissibility, as is typical in virus outbreaks), which is highlighted by a report in the Lancet Journal, with April seen as likely to mark the point of peak contagion. This backdrop, coupled with news of fresh contagion-stemming measures and preparations being taken around the globe, including in Europe and the U.S., helped stock markets in Asia rebound from early selling pressure. Japan was an exception, with markets there playing catch up after reopening form a holiday yesterday. 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 while risk aversion prevails in global markets.

    [GBP, USD]
    Sterling has recouped some of the losses seen yesterday. Cable has settled around the 1.2950 mark after a 0.5% decline yesterday left a low at 1.2886. The pair is about at the midway point of the choppy range that's been seen over the last two weeks. While January and February data have been showing a post-election rebound in economic activity in the UK, Brexit remains a concern. UK Prime Minister Johnson reaffirmed yesterday that he is prepared to walk away from the table if upcoming trade talks with the EU don't go his way. Johnson is wanting both a free trade agreement with the EU at the same time as regulatory divergence from the Union, which he sees as necessary for the UK to "restore independence," and this to be agreed in time for a January 1st 2021 implementation. Both critics of Johnson and the EU officials, including French President Macron, argue that the time frame is too short to negotiate anything other that a rudimentary goods trade deal, and that a comprehensive free trade deal will not be possible without regulatory alignment. A Reuters poll last week found two thirds of economists questioned are expecting the UK to strike a goods-only trade deal with the EU, and for the Brexit transition period to end at the end of the year without extension. Unless there is a deal with the EU on services, or among other major global economies (unlikely in the available time frame of 10 months), the risk is that the UK's overall terms of trade will drop quite sharply in January 2021. BoE's Carney said last week that the reorganisation of the economy as the UK and EU build a new relationship would weigh on activity.

    [USD, CHF]
    EUR-CHF has lifted back above 1.0600 after yesterday clocking a new five-year-low at 1.0590. 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 has ebbed back below 1.3300 amid a hiatus in the risk-off positioning of yesterday, which left a two-week high at 1.3307 on a combo of U.S. outperformance and Canadian dollar underperformance, with the latter impacted by a precipitous 5%-plus decline in oil prices. Crude markets have today found a footing today, as has the Canadian currency. The Canadian currency will likely remain subject to near-term volatility as long as the coronavirus contagion remains in a state of increasing spread.

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