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By XE Market Analysis January 28, 2020 4:11 am
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    XE Market Analysis: Europe - Jan 28, 2020

    The yen and Swiss franc softened, paring some of the safe-haven premiums built up in recent sessions, as the pace of risk-off positioning came off the boil, with Asian stock markets managing to pare intraday losses, although remaining well in the red. S&P 500 futures also managed to rebound by 0.6% after the cash version of the index closed with its biggest daily loss, of 1.6%, in nearly six months yesterday. Chinese markets remained closed, thought the iShares China Large-Cap ETF has racked up a loss of over 10% since January 17. Investor confidence will remain fragile, faced with the epistemological "known unknown" conundrum of how bad and how widespread, and how economically damaging, will the prevailing outbreak of the coronavirus stemming out of China will be. USD-JPY recouped above the 109.00 level, extending a moderate recovery from the three-week low seen yesterday at 108.73. EUR-USD has once again plied a narrow range, this time around the 1.1020 mark, above the near two-month low that was seen yesterday at 1.1009. The low was the culmination of a moderate downtrend that's been unfolding over the last couple of weeks, from levels above 1.1150. Sterling remained heavy, with UK rate markets discounting about 57% odds for the BoE to cut the repo rate by 25 bp at its policy review this Thursday. Cable ebbed to a one-week low at 1.3024, and EUR-GBP posted a six-day high at 0.8457. The Australian dollar saw fresh lows. AUD-JPY printed a two-and-a-half-month low at 73.42, while AUD-USD posted a three-month-plus low at 0.6747.

    [EUR, USD]
    EUR-USD has once again plied a narrow range, this time around the 1.1020 mark, above the near two-month low that was seen yesterday at 1.1009. The low was the culmination of a moderate downtrend that's been unfolding over the last couple of weeks, from levels above 1.1150. The dollar has been outperforming the common currency in the context of rising risk aversion in global markets. The ECB 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 76% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    The yen softened, paring some of the safe-haven premium built up in recent sessions, as the pace of risk-off positioning came off the boil, with Asian stock markets managing to pare intraday losses, although remaining well in the red. S&P 500 futures also managed to rebound by 0.6% after the cash version of the index closed with its biggest daily loss, of 1.6%, in nearly six months yesterday. Chinese markets remained closed, thought the iShares China Large-Cap ETF has racked up a loss of over 10% since January 17. USD-JPY recouped above the 109.00 level, extending a moderate recovery from the three-week low seen yesterday at 108.73. Investor confidence will remain fragile, faced with the epistemological "known unknown" conundrum of how bad and how widespread, and how economically damaging, will the prevailing outbreak of the coronavirus stemming out of China will be. Against this backdrop, we expect the yen to remain biased to outperform most other currencies.

    [GBP, USD]
    Sterling has remained heavy, with UK rate markets discounting about 57% odds for the BoE to cut the repo rate by 25 bp at its policy review this Thursday. Cable ebbed to a one-week low at 1.3024, and EUR-GBP posted a six-day high at 0.8457. We don't expect the BoE to cut, and therefore anticipate some scope for a rebound in the pound. Our view is that the majority of the nine member Monetary Policy Committee will want to refrain from easing amid signs of a post-election rebound in economic activity, as evidenced by a much stronger than expected rebound in preliminary PMI and CBI industrial trends January survey data. Both ourselves and markets are still expecting dissension in the MPC ranks, with Saunders and Haskell seen repeating their call (for what will be a third successive meeting) for a 25 bp cut in the repo rate, to 0.50%, and possibly joined by their dovish MPC colleague Vlieghe. A vote for unchanged policy would leave the repo rate at 0.75%. The MPC is also expected to vote unanimously in favour for maintaining the prevailing QE amounts. Brexit will happen in the legal sense at midnight on Friday, though not a lot will change in practical terms as the UK will remain in the single market and customs union through to the end of 2020. We still don't know for sure what sort of Brexit is in store -- whether one of strong divergence with the EU, or close alignment. Members of the government's cabinet having been giving out mixed signals on this, though we suspect that the government will ultimately opt for close alignment (on the basis that size and proximity are the most important factors when it comes to trade).

    [USD, CHF]
    EUR-CHF printed a 33-month low at 1.0677, and further new lows are looking likely given the deepening concerns about contagion (and mutation) of the coronavirus. 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 printed a near-seven-week high at 1.3200 in what is now the pair's fourth consecutive up week. The Canadian dollar looks likely to continue to underperform its major peers with oil prices down over 18% over the last several weeks. Sustained shifts in oil prices have the potential to affect Canada's terms of trade. The IEA forecast there will be a crude surplus in the first half of the year, while investors are also anticipating a demand erosion for crude as a consequence of the spreading coronavirus.

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