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By XE Market Analysis January 27, 2020 4:09 am
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    XE Market Analysis: Europe - Jan 27, 2020

    Risk-off has taken a grip amid fears that the coronavirus is going likewise, with both the number and geographical spread of reported cases increasing, along with evidence that the virus is mutating and more aggressive than the SARS outbreak in 2003. Market conditions were thinned in Asia with China and Hong Kong, along with South Korea and Australian out for public holidays. Stock markets that were open dove, and European and U.S. index futures posted heft losses. In forex, the yen and Swiss franc outperformed as their respective safe haven premiums richened, while the dollar bloc currencies underperformed. Many regional Asian currencies came under particularly pressure, with the Singapore dollar, for instance, losing 0.5% in falling to a one-month low against the U.S. dollar. Among the main currencies, USD-JPY dove at the opening of trading from levels near 109.30, and subsequently extended to a three-week low at 108.73. The pair since recouped somewhat, to levels around 109.0. EUR-JPY hit a two-month low, at 119.93, while AUD-JPY printed a 19-day low. The AUD-JPY and NZD-JPY crosses were the biggest movers during the Asia-Pacific session, showing respective declines of 0.6% and 0.8%. Losses in the Aussie came despite a drop-off in expectations for the RBA to cut the cash rate at its approaching policy review, on February 4th. Market positioning in Australian cash rate futures imply a 19% probability for a 25 bp rate cut, down from the 58% odds being given as recently as last Thursday, before the release of an unexpectedly solid employment report out of Australia. AUD-USD posted an eight-week low at 0.6791, and NZD-USD a five-week low, at 0.6569. EUR-USD has seen less than a 10-pip range just above the eight-week low seen on Friday at 1.1019. Sterling came under moderate pressure, with Cable edging out a five-day low, at 1.3051, and EUR-GBP lifting just above its Friday high at 0.8430. USD-CAD lifted to a near-five week high at 1.3173. The Canadian dollar looks likely to continue to underperform its major peers with oil prices down over 2% today as markets anticipate a demand erosion as a consequence of the spreading coronavirus.

    [EUR, USD]
    EUR-USD has seen less than a 10-pip range just above the eight-week low seen on Friday at 1.1019. The pair ebbed last week, by a moderate 0.5%, with the dollar outperforming the common currency in the context of rising risk aversion in global markets. The ECB also left policy and guidance unchanged at its policy review last Thursday, with the central bank's president, Lagarde, stating that economic risks remain tilted to the downside and that accommodative monetary policy will 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 about 72% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    The yen has seen its safe-haven premium richen amid a backdrop of risk-off positioning in global markets. It's now become clear that the sweet spot for prevention and control of the coronavirus in China has passed, with both the number and geographical spread of reported cases increasing, along with evidence that the virus is both mutating and more aggressive than the SARS outbreak in 2003. Market conditions were thinned in Asia with China and Hong Kong, along with South Korea and Australian out for public holidays. Stock markets that were open dove, and European and U.S. index futures posted heft losses. In Japan, the Nikkei 225 closed with a 2% loss. Many regional Asian currencies came under particularly pressure, with the Singapore dollar, for instance, losing 0.5% in falling to a one-month low against the U.S. dollar. USD-JPY dove at the opening of trading from levels near 109.30, and subsequently extended to a three-week low at 108.73. The pair since recouped somewhat, to levels around 109.0. EUR-JPY hit a two-month low, at 119.93, while AUD-JPY printed a 19-day low. The AUD-JPY and NZD-JPY crosses were the biggest movers during the Asia-Pacific session, showing respective declines of 0.6% and 0.8%. The Japanese currencies looks likely to continue to rally.

    [GBP, USD]
    Sterling came under moderate pressure, with Cable edging out a five-day low, at 1.3051, and EUR-GBP lifting just above its Friday high at 0.8430. The pound's sharp drop from post-data highs on Friday revealed a truth about where market sentiment is. First, a recap of the price action: Sterling rallied in the immediate wake of an unambiguously solid outcome of the UK's preliminary January PMI surveys (above forecasts, composite headline at a 16-month high, business optimism at its best in four-and-a-half years, employment up etc) only to quickly turn sharply lower, and more than give back post-data gains. The pound has since remained heavy. This seems quite surprising as the data backed up anecdotal signs of a post-election rebound in the UK economy, while seeing expectations for a BoE rate cut as soon as this Thursday's policy review dwindle. The selling-into-gains reaction is telling of an underlying bearish view of the pound, however. The source of this bearishness? Brexit, and more particularly signs that the government is pursuing a strong break from the EU. Of note was the UK Chancellor of the Exchequer (finance minister) Javid's clear emphasis in a recent FT interview that the government is seeking divergence from the EU and not a closely aligned post-Brexit relationship. The question of divergence versus close alignment has been fundamental in the Brexit debate, with the former treated by markets as a positive and the latter a negative for the pound. What's notable is that government's bias contrasts to the "common high standards" in the declaration on the future relationship. Javid also emphasized that the government will stick to its credibility-stretching 11-month timetable for negotiations, after which the UK will leave the transition period, with an implied threat of the UK leaving the EU's single market at the end of the period without a deal if things don't go well at the negotiating table.

    [USD, CHF]
    EUR-CHF dove to a new 33-month low at the open of trading in Asia-Pacific today, at 1.0693. USD-CHF, in contrast, held up, with the dollar holding its own against the European currencies. The new low in the EUR-CHF cross reflected a further a richening in safe-haven premiums in global markets. Concerns about contagion (and mutation) of the coronavirus have been affecting market sentiment across the world. The franc had already rallied strongly earlier in the month 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 lifted to a near-five week high at 1.3173. The Canadian dollar looks likely to continue to underperform its major peers with oil prices down over 2% today as markets anticipate a demand erosion as a consequence of the spreading coronavirus. The IEA also forecast, recently, there will be a crude surplus in the first half of the year.

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