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By XE Market Analysis February 26, 2020 3:54 am
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    XE Market Analysis: Europe - Feb 26, 2020

    The Australian dollar tumbled to fresh major-trend lows versus the U.S. dollar following a big miss in Q4 construction data out of Australia, which contracted 3.0% q/q versus the median forecast for -1.0%. The data suggests Q4 GDP may be weaker than expected, and that's before the Q1 impact of the worst-in-decades wildfires, the sharp drop in Chinese tourist visits over the Lunar New Year period and other economic disruptions caused by the coronavirus outbreak. AUD-USD hit a new 11-year low at 0.6569. Elsewhere, USD-JPY has recouped to levels around 110.50 from yesterday's eight-day low at 109.89. Yen crosses have mostly followed suit, though AUD-JPY printed a 23-day low at 72.48, nearing the four-and-a-half-month low that was seen in early February at 72.41. EUR-USD corrected to levels around 1.0865 after yesterday posting a two-week peak at 1.0890. The pair lifted yesterday as the U.S. 10-year T-note yield hit a record low following a second consecutive day of sharp losses on Wall Street. EUR-CHF has remained above the five-year low seen earlier in the week at 1.0590. USD-CAD has steadied in the upper 1.3200s. Ahead, it's clear that the COVID-19 virus hasn't reached peak contagion rate, and the media hype and (arguably) panicky responses by governments -- with the consequence of economically disruptive containment measures -- seems more likely to grow than to wane at this point. Further bouts of pronounced risk-off positioning therefore seem in store. Ultimately, the proclivity for viruses to weaken as they pass through populations, coupled with the remedying influence of upcoming spring weather in the northern hemisphere, along with efforts to contain the spread, should bring an end to COVID-19.

    [EUR, USD]
    EUR-USD corrected to levels around 1.0865 after yesterday posting a two-week peak at 1.0890. The pair lifted yesterday as the U.S. 10-year T-note yield hit a record low following a second consecutive day of sharp losses on Wall Street. The fact that the yield low reflected safe-haven buying suggests that dollar losses may not sustain, with the liquidity and still relatively high yields of the U.S. Treasury market making U.S. sovereign debt a safe haven of choice for global investors (recent data showed a record level of Treasury purchases by Japanese investors, for instance). We still anticipate a revisit of EUR-USD's 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 6.5% 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, 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 has recouped to levels around 110.50 from yesterday's eight-day low at 109.89. Yen crosses have mostly followed suit, though AUD-JPY printed a 23-day low at 72.48, nearing the four-and-a-half-month low that was seen in early February at 72.41. Recent price action has re-affirmed the yen's status as a safe haven currency. 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. It's clear that the COVID-19 virus hasn't reached peak contagion rate, and the media hype and (arguably) panicky responses by governments -- with the consequence of economically disruptive containment measures -- seems more likely to grow than to wane at this point. Further bouts of pronounced risk-off positioning therefore seem in store. Ultimately, the proclivity for viruses to weaken as they pass through populations, coupled with the remedying influence of upcoming spring weather in the northern hemisphere, along with efforts to contain the spread, should bring an end to COVID-19.

    [GBP, USD]
    The pound has settled today after outperforming the main currencies yesterday, which was prompted by the EU's publishing of its trade negotiation mandate with the EU, which stipulates that EU standards (in areas such as social and employment, environment, tax and regulations etc) should only be "a reference point" in negotiations with the UK to form a post-Brexit trade agreement. The lack of an explicit demand for dynamic alignment has been taken a positive for the pound, suggesting there may sufficient flexibility for the UK and EU to reach an agreement. Formal trade negotiations between the UK and EU will commence next Monday (March 2nd). The pound will continue to be buffeted by news from the trade negotiation front. A deal between the UK and EU is possible by the end of the year despite the short time frame, given they are starting from perfect equivalence, though anything short of a comprehensive free trade deal (which looks unlikely to be achieved) would be a negative for the pound. When the UK leaves the Brexit transition period at the end of 2020, it will not just be leaving the EU's single market and customs union, but also participation in the 40 free trade deals the EU has around the world. For now, we retain an overall neutral view of sterling, with downside risk seen as the year progresses.

    [USD, CHF]
    EUR-CHF has remained heavy after clocking a new five-year-low at 1.0590 on Monday. 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 settled in the upper 1.3200s after posting a two-week high on Monday 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 since remained heavy, though above recent lows. The Canadian currency will likely remain subject to near-term volatility as long as the coronavirus contagion remains in a state of increasing spread. The risk is for further gains in USD-CAD as the spread of the COVID-19 virus doesn't look to have reached a peak, in turn suggesting more economic disruption and less demand for oil.

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