Home > XE Currency Blog > XE Market Analysis: Europe - Jan 21, 2020

AD

XE Currency Blog

Topics7137 Posts7182
By XE Market Analysis January 21, 2020 3:30 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5061
    XE Market Analysis: Europe - Jan 21, 2020

    The biggest mover has been a decline in AUD-JPY in the main currency markets so far today, with the cross proving most sensitive to rising concerns about the strain of coronavirus in China, which are being exacerbated by the approaching Lunar New Year holiday period in China, a period of heightened people travelling that risks accelerating the spread of contagion. If things turn critical, airlines and tourism would be at the forefront of economic victims, similar to the case of the SARS virus in 2003. Australia normally receives large numbers of Chinese tourists over the Lunar New Year period, which is why its currency has come under pressure, especially as this comes amid the wildfires. AUD-JPY dropped over 0.5% in posting an 11-day low at 75.32. AUD-USD also printed an 11-day nadir, at 0.6853. USD-JPY, meanwhile, has put in its biggest daily decline since January 3rd, although still only of a 30-pip magnitude, in falling to a five-day low at 109.88, which puts in a little distance from the eight-month high the pairing saw last Friday at 110.28. EUR-JPY and other yen crosses also ground lower as the yen's safe-haven premium richened. The BoJ left monetary policy on hold while nudging up growth forecast on receding global risks (improved trade relations, less risk of oil-disrupting Mideast conflict), as had been widely expected. Elsewhere, EUR-USD has continued to ply a narrow range near 1.1100. Cable has also seen narrow range trading, near 1.3000. USD-CAD dipped below 1.3050 though remained comfortably within recent ranges, despite a near 2.5% correction in oil prices from the high seen yesterday, with concerns about the supply outage in Libya having abated. To note, the IMF trimmed global growth forecasts due to unexpected slowing in India and other developing-nation economies, which is an added worry in the context of the evolving coronavirus situation in China. President Trump will be addressing the World Economic Forum in Davos later today. His tone on trade will be a focus.

    [EUR, USD]
    EUR-USD has continued to ply a narrow range near 1.1100, holding above the four-week low seen yesterday at 1.1076. Bigger picture, EUR-USD 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 with the Fed having backed out of its tightening cycle after hiking rates three times last year. The central bank has since been engaged in capping the repo rate, which has seen its balance swell by some 11% since last September. The ECB, meanwhile, remains entrenched in a policy wait-and-see mode.

    [USD, JPY]
    The yen has attracted safe-haven demand amid rising concerns about the strain of coronavirus in China, which are being exacerbated by the approaching Lunar New Year holiday period in China, a period of heightened people travelling that risks accelerating the spread of contagion. If things turn critical, airlines and tourism would be at the forefront of economic victims, similar to the case of the SARS virus in 2003. USD-JPY, meanwhile, has put in its biggest daily decline since January 3rd, although still only of a 30-pip magnitude, in falling to a five-day low at 109.88, which puts in a little distance from the eight-month high the pairing saw last Friday at 110.28. AUD-JPY, EUR-JPY and other yen crosses also ground lower as the yen's safe-haven premium richened. The BoJ left monetary policy on hold while nudging up growth forecast on receding global risks (improved trade relations, less risk of oil-disrupting Mideast conflict), although trimming CPI forecasts, as had been widely expected. To note, the IMF trimmed global growth forecasts due to unexpected slowing in India and other developing-nation economies, which is an added worry in the context of the evolving coronavirus situation in China. We have gone from bullish to bearish on USD-JPY, anticipating a relatively sustained wobble in richly priced global stock markets, which in turn would underpin the Japanese currency.

    [GBP, USD]
    Sterling has settled in narrow range trading after yesterday edging out a five-day low against the dollar at 1.2962. The possibility of the BoE cutting rates at its MPC meeting this Thursday should keep the pound's upside capped. An unexpected 0.6% m/m contraction in UK retail sales in December data, along with sub-forecast December CPI outcome, of 1.3% y/y, and underwhelming November industrial production and GDP data, have strengthened expectations for the BoE to cut the repo rate by 25 bp as soon as this week's Monetary Policy Committee meeting. Positioning in the OIS markets is implying about a 70% probability for such a move this month, up up from around 25% odds that were being implied the week before. We think the BoE will refrain from cutting rates at this juncture, and instead opt to ratchet up dovish guidance. Policymakers will still be looking to see the full impact that the lifting of Brexit and political fog has has since the election in mid December, especially with the global economy looking to be holding up. Next UK data of note will be labour data, due later today. The flash January PMI survey is also on the near horizon, on Friday, after the BoE decision, which is expected to show a rise in the composite headline, to 50.5, from December's 49.5 reading. Note that the latest week CFTC data shows the longest net long positioning in sterling futures by speculative accounts since April 2018, with looks incongruous with the BoE's dovish march.

    [USD, CHF]
    EUR-CHF has remained heavy after hitting a 33-month low at 1.0731 on Friday. The franc rallied strongly last week following the logic-defying decision by the U.S. to add Switzerland to its list of currency manipulators earlier in the week. 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). The U.S. argues that Switzerland needs a more expansive fiscal policy.

    [USD, CAD]
    USD-CAD dipped below 1.3050 though remained comfortably within recent ranges, despite a near 2.5% correction in oil prices from the high seen yesterday, with concerns about the supply outage in Libya having abated. The BoC meets on policy today. We expect the central bank to hold rates steady at 1.75%. The Monetary Policy Report will also be published, which will detail the bank's growth and inflation outlook. Our base case remains for no change in rates this year amid a steady outlook from the BoC.

    Paste link in email or IM