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By XE Market Analysis March 2, 2020 4:01 am
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    XE Market Analysis: Europe - Mar 02, 2020

    Some respite from virus anxiety and a partial unwinding in risk-off positioning saw the yen weaken and the commodity bloc and other currencies with higher beta characteristics rebound. Amid this broad theme was a continued outperformance in the euro versus most of the other main currencies, outside the dollar bloc. The biggest movers out of the dollar majors and associated cross rates was AUD-JPY and CAD-JPY, with 1.3% and 1.2% advances. AUD-USD gained over 0.5%, lifting out of 11-year low terrain. USD-CAD dropped by a similar magnitude, posting a four-day low at 1.3333, with the Canadian dollar continued its rigid with correlation with oil prices, which have rallied by over 3% amid expectations for OPEC to tighten supply. While the COVID-19 virus continued to spread, and February PMI manufacturing data out of China showed a record drop in activity as a consequence of factory shutdowns, market participants are focusing in on prospects for coordinated stimulus actions by central banks and governments across the globe. G7 finance ministers will hold teleconference this week to coordinate their response to the virus outbreak, according to French Finance Minister Le Maire. Markets are fully factoring in a 50 bp rate cut by the Fed at its upcoming March-18th meeting, a side effect of which has been recent weakness in the dollar, especially against the euro. EUR-USD posted its seventh consecutive up day in making a one-month high at 1.1078. Markets are also fully factoring a 25 bp cut from the RBA, tomorrow, while BoJ Governor Kuroda said today that his central bank would take necessary steps to stabilise markets. At the same time, countries in Europe, the Middle East and the Americas have also banned big gatherings while imposing stricter travel restrictions. There are also remains scientific conjecture that the virus should weaken with time, possibility aided by the improving weather in the northern hemisphere. Incoming February PMI surveys will be a focus, along with the rate of spread of the coronavirus.

    [EUR, USD]
    EUR-USD posted its seventh consecutive up day in making a one-month high at 1.1078. This come with markets now fully factoring in a 50 bp rate cut by the Fed at its upcoming March-18th meeting, which has weakened the dollar. The euro has been principal beneficiary of a broad rotation lower in the dollar, which has been concurrent with U.S. Treasury yields hitting record lows, which has catalyzed a squeeze on euro short positions (the euro was trading at 34-month lows less then two weeks ago). The U.S. 10-year T-note advantage versus the 10-year Bund yield has narrowed by some 25 bp over the last two weeks, from levels around 200 bp to levels below 175 bp. Given the negative yields and apparent exposure to the coronavirus in the Eurozone (Italy ranking as the number 2 country with the most reported cases of COVID-19 outside of China), coming at a time with German growth sputtering as demand for its exports dives, we don't expect euro gains to sustain against the dollar. The U.S. Treasury market remains a top safe haven for global capital (being liquid, safe and positively yielding). Markets will be monitoring the relative impact of the COVID-19 virus, and efforts to contain it, between the U.S. and Eurozone.

    [USD, JPY]
    The yen has seen some of its safe haven premium unwind amid some respite from virus anxiety and a partial unwinding in risk-off positioning. While the COVID-19 virus continued to spread, and February PMI manufacturing data out of China showed a record drop in activity as a consequence of factory shutdowns, market participants are focusing in on prospects for coordinated stimulus actions by central banks and governments across the globe. G7 finance ministers will hold teleconference this week to coordinate their response to the virus outbreak, according to French Finance Minister Le Maire. Markets are fully factoring in a 50 bp rate cut by the Fed at its upcoming March-18th meeting. Markets are also fully factoring a 25 bp cut from the RBA, tomorrow, while BoJ Governor Kuroda said today that his central bank would take necessary steps to stabilise markets. At the same time, countries in Europe, the Middle East and the Americas have also banned big gatherings while imposing stricter travel restrictions. There are also remains scientific conjecture that the virus should weaken with time, possibility aided by the improving weather in the northern hemisphere. Incoming February PMI surveys will be a focus, along with the rate of spread of the coronavirus. Japan Jibun Bank February manufacturing PMI fell back to 47.8 from 48.2. Ahead, the yen will likely remain prone to bouts of safe-haven driven outperformance until markets have clarity that the peak of the COVID-19 virus spread has come and gone.

    [GBP, USD]
    The pound has been trading heavily lately. Cable on Friday printed a four-month low at 1.2726 while EUR-GBP today posted a four-month high, at 0.8686. Trade discussions between the London and Brussels will commence today, the UK government having signalled that it will be taking an uncompromising stance, stating in its mandate for trade negotiations with the EU, published last week, that it is prepared to leave without a deal at the end of the Brexit-transition phase on December 21st 2020. Given this and the limited time available, it's hard not to conclude that nothing more than a relatively narrow goods-only trade will be feasible. That suggests, come January 1st next year, a high proportion of UK trade (including all services) will shift to less favourable WTO terms. Bear in mind that 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. Replacing those deals with new bilateral agreements will take years. We assume that the UK's bluster is typical pre-negotiation posturing, and anticipate that a deal will be made, though without an extension in the Brexit-transition period and without a deal that includes services, which at the moment look likely, the pound is likely to retain a discount relatively to other currencies.

    [USD, CHF]
    EUR-CHF has rallied to a one-month peak at 1.0702, extending a marked rebound from the near five-year low the cross posted on Friday, at 1.0585. The gains the cross has seen have coat-tailed a rally in EUR-USD, which has been the principal beneficiary of a rotation lower in the dollar amid expectations for an upcoming 50 bp rate cut from the Fed. There has also been a unwinding in risk-off positioning, which has weighed on the Swiss currency. The U.S. in January 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 dropped by about 0.5% in posting a four-day low at 1.3333, with the Canadian dollar continued its rigid with correlation with oil prices, which have rallied by over 3% amid expectations for OPEC to tighten supply. 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.

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