Home > XE Currency Blog > XE Market Analysis: Europe - Jan 24, 2020

AD

XE Currency Blog

Topics6945 Posts6990
By XE Market Analysis January 24, 2020 4:06 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 4869
    XE Market Analysis: Europe - Jan 24, 2020

    Narrow ranges have been seen in currency markets in sympathy with directionless trading in stocks and other markets. China, Taiwan and South Korea markets were closed for Lunar New Year holidays, with the former two now closed through to the end of next week. Markets have hunkered down, waiting to see how well China and other nations will contain the coronavirus outbreak. Some 25 million people are now effectively in quarantine in China, and travel bans have been issued, and Chinese cities, including Beijing, have cancelled New Year celebrations, while the World Health Organization labelled the outbreak an emergency (amid criticism that it was too slow in doing so). Concerns remain, however, that the sweet spot for prevention and control has been missed, with reported cases cropping up across Asia and in the U.S. Time will tell. In forex markets, both EUR-USD and USD-JPY have plied less-than-20-pips ranges, respectively, the former near 1.1050 and the latter near 109.50. AUD-USD has steadied in the mid 0.6800s steadied after recent volatility. The pound has seen modest firmness, rising against the dollar to a 1.3138 high, though remaining shy of yesterday's high at 1.3151, while EUR-GBP scraped out a new five-week low at 0.8410. USD-CAD has consolidated in the lower 1.3100s following a correction from the one-month high seen yesterday at 1.3171. Oil prices have found a footing after tumbling by nearly 8% this week.

    [EUR, USD]
    EUR-USD found a footing after printing a seven-week low at 1.1036 yesterday. The ECB left policy and guidance unchanged yesterday. The central bank's president, Lagarde, said that economic risks remain tilted to the downside and that accommodative monetary policy would remain in place for the foreseeable future. Bigger picture, the pair 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, however, with the Fed having backed out of its tightening phase 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, and Fed funds futures are discounting over 60% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    The yen has steadied amid a general lack of direction in markets. China, Taiwan and South Korea markets were closed for Lunar New Year holidays, with the former two now closed through to the end of next week. Markets have hunkered down, waiting to see how well China and other nations will contain the coronavirus outbreak. Some 25 million people are now effectively in quarantine in China, and travel bans have been issued, and Chinese cities, including Beijing, have cancelled New Year celebrations, while the World Health Organization labelled the outbreak an emergency (amid criticism that it was too slow in doing so). Concerns remain, however, that the sweet spot for prevention and control has been missed, with reported cases cropping up across Asia and in the U.S. Time will tell. USD-JPY has so far plied less-than-a-20-pip range near 109.50.

    [GBP, USD]
    The pound has seen modest firmness, rising against the dollar to a 1.3138 high, though remaining shy of yesterday's high at 1.3151, while EUR-GBP scraped out a new five-week low at 0.8410. The UK has in recent sessions pared its year-to-date decline in light of above-forecast November labour data and the January CBI's industrial trends survey that showed business optimism to have leapt to a reading of +23 from -44. Although headline activity remained in the CBI's report, the data provided a sign that a post-election boost in economic activity may be happening as pent-up investment and decision making are freed by the lifting of the Brexit and political fog. UK markets have consequently de-scaled expectations for the BoE to cut rates as soon as next week's policy meeting. We have been arguing that the BoE is likely to refrain from cutting rates at this juncture, and instead opt to ratchet up dovish guidance. Most policymakers on the Monetary Policy Committee will likely want more time to judge the impact of the December election result, especially with the global economy looking to be holding up, and with the government set to pursue a more expansive fiscal policy. Next UK data of note is today's flash January PMI surve which we expect to show a rise in the composite headline, to 50.5, from December's 49.5 reading. This matches the consensus forecast.

    [USD, CHF]
    EUR-CHF found a toehold out posting a fresh 33-month low at 1.0702 yesterday. The low reflected a richening in safe-haven premiums in global markets, which underpinned the Swiss currency. Concerns about contagion (and mutation) of the coronavirus have been affecting market sentiment across the world. The franc had already rallied strongly last week following the surprising 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), though the Trump administration argues that Switzerland needs a more expansive fiscal policy.

    [USD, CAD]
    USD-CAD has consolidated in the lower 1.3100s following a correction from the one-month high seen yesterday at 1.3171. Oil prices have found a footing after tumbling by nearly 8% this week. Losses were driven by concerns about the demand impact from the virus in Asia, along with the IEA forecasting a crude surplus in the first half of the year. The BoC left policy on hold at its policy review this week, as had been widely anticipated. The statement said: "Data for Canada indicate that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October", noting that, "job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft." We anticipated USD-CAD to trade with an upside bias going forward.

    Paste link in email or IM