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By XE Market Analysis February 27, 2020 4:26 am
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    XE Market Analysis: Europe - Feb 27, 2020

    The dollar has been trading mostly softer, concomitantly with the U.S. 10-year Treasury yield posting a fresh record low in Asian trading, though the greenback still managed modest gains versus the Canadian dollar, which has underperformed as oil prices hit 14-month lows. The narrow trade-weighted USD index (DXY) printed a two-week low at 98.86, extending the correction from the 34-month peak seen February 20th at 99.91. The dollar also lost ground to the Singapore dollar and Thai baht, among other developing world currencies that have managed to find a foothold after recent sharp losses. The yen and Swiss franc safe haven currencies have also traded steady-to-softer, for the most part, though AUD-JPY still managed to carve out a four-and-a-half-month low before recouping. USD-JPY ebbed to a low of 109.96 after closing in New York at 110.43-44, though remained above the eight-day low seen on Tuesday at 109.89. EUR-USD posted a two-week high at 1.0922 on the back of dollar softness. The U.S. 10-year T-note yield advantage versus the 10-year Bund yield has narrowed by about 16 bp since last Friday, to 182.8 bp currently, which has been concurrent with a rotation higher in EUR-USD from sub-1.0800 levels. Global stock markets remain fragile. S&P 500 futures are down 0.6% and most Asian markets dropped by varying degrees, though China and Hong Kong markets managed modest gains. The phrase "global pandemic" is being used with more frequency as the COVID-19 virus continues to spread outside of China, with the the number of new cases outside China now exceeding those being reported in China. The U.S. confirmed the first likely case of community transmission (i.e. not involving someone who had been in China) and Germany warned that it can no longer trace all cases. Until there is signs that the spread of the coronavirus is retreat, bouts of risk aversion are likely to persist in global markets.

    [EUR, USD]
    EUR-USD posted a two-week high at 1.0922 on the back of dollar softness. The U.S. 10-year T-note yield advantage versus the 10-year Bund yield has narrowed by about 16 bp since last Friday, to 182.8 bp currently (the narrowest since January 2017), which has been concurrent with a rotation higher in EUR-USD from sub-1.0800 levels in what is the pair's most sustained run higher of the year so far. The narrow trade-weighted USD index (DXY) printed a two-week low at 98.86, extending the correction from the 34-month peak seen February 20th at 99.91. We don't anticipate too much upside potential for EUR-USD from here given the headwinds being faced by Europe. A drop in export demand has hit the Germany economy, while Italy ranks as having the second highest number of COVID-19 cases outside China, while Germany warned yesterday that it can no longer trace all cases. International demand for Treasuries, with their deep liquidity and still relatively high yields, is also likely to remain high should risk aversion in markets persist, which should in turn underpin the dollar. Recent data showed a record level of Treasury purchases by Japanese investors. We still anticipate a revisit of EUR-USD's 34-month low at 1.0778, which was seen last Thursday.

    [USD, JPY]
    The yen has been trading steady-to-softer so far today, for the most part, though AUD-JPY still managed to carve out a four-and-a-half-month low before recouping. USD-JPY ebbed to a low of 109.96 after closing in New York at 110.43-44, though remained above the eight-day low seen on Tuesday at 109.89. BoJ's Kataoka said the BoJ must send a message to markets that it will not tolerate price falls, and repeated that the central bank is ready to ease monetary policy further if necessary. Despite this, we anticipate that the yen will remain prone to bouts of safe-haven driven outperformance. The phrase "global pandemic" is being used with more frequency as the COVID-19 virus continues to spread outside of China, with the the number of new cases outside China now exceeding those being reported in China. The U.S. confirmed the first likely case of community transmission (i.e. not involving someone who had been in China) and Germany warned that it can no longer trace all cases. Until there is signs that the spread of the coronavirus is retreat, phases of risk-off positioning are likely to persist in global markets.

    [GBP, USD]
    The pound has posted 16- and 17-day lows against the yen and euro, respectively, though has managed to find a footing versus an underperforming dollar, with Cable lifting to around 1.2940 after yesterday printing a three-day low at 1.2896. News that the government is delaying its 2020-21 budget presentation has increased market expectations that the government is delaying plans for fiscal expansion until later in the year. The BoE had cited among its reasons to refrain from cutting rates in January was the expectation for looser fiscal policy. Positioning in the OIS market implies that markets are pricing in a chance for a 25 bp BoE rate cut, which would take the repo rate to 0.50%, as early as the March-26 Monetary Policy Committee meeting, with such a move fully priced in for the August-6 MPC gathering. The Brexit process, meanwhile, remains a focus and worry for investors. Trade negotiations between the UK and EU commence on Monday (March 2nd). 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 bearish view of sterling.

    [USD, CHF]
    EUR-CHF has eked out a 10-day high at 1.0639, extending the modest rebound from the five-year-low that was seen on Monday 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 posted a five-month high at 1.3347 in what is now the sixth up week the pair has seen out of the last eight weeks. Fresh declines in oil prices have driven continued underperformance in the Canadian dollar. Front-month WTI crude prices hit a 14-month low at $47.83, which is the current culmination of a 27%-plus drop from the highs seen in early January. If sustained, this marks a big erosion in Canada's terms of trade, given the importance of crude exports to its economy. The Canadian currency will likely remain subject to near-term volatility and overall underperformance 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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