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By XE Market Analysis March 3, 2020 4:03 am
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    XE Market Analysis: Europe - Mar 03, 2020

    The yen firmed during the Tokyo session, rebounding out of early weakness, while most Asian and developing-world currencies came back under pressure as markets took a more circumspect view of expected global monetary easing, with some narratives questioning the efficacy of such a policy response in the face of travel restrictions and other disruptions from virus containment efforts. G7 finance minister and central bank governors will be holding a conference call at 12:00 GMT (07:00 ET) today. Reuters reported that the draft statement doesn't specifically mention cutting interest rates. Stock markets in Asia have mostly gained today, though most came off the boil after AM session gains. S&P futures turned flat after the cash version of the index closed out yesterday on Wall Street with a solid 4.6%, partially reversing last week's plummet. Among the main currencies, USD-JPY, after lifting to a high at 108.53 in early Tokyo trading, turned lower, back below 108.00 and to an intraday low at 107.66. The range so far has been within yesterday's range. EUR-USD has come to a pause after seven consecutive up days, which left a two-month high at 1.1184 yesterday. The pair has settled in the lower 1.1100s. Euro crosses, such as EUR-GBP ,EUR-CHF and EUR-JPY have also traded softer. The dollar bloc currencies, after staging a rebound from recent lows yesterday, traded steadily. The RBA's fully expected 25 bp cut in the cash rate to a 0.5% record low, and signal for more action if necessary, had little impact on the Aussie dollar. Elsewhere, the pound settled after a phase of underperformance. Regarding the COVID-19 virus, reported cases has so far remained limited, albeit widespread, outside of China, South Korea, Italy, Iran and Japan, with total confirmed cases in the rest of the world standing at only 432. This could change quickly of course, so markets will remain on guard.

    [EUR, USD]
    EUR-USD has come to a pause after seven consecutive up days, which left a two-month high at 1.1184 yesterday. The pair has settled in the lower 1.1100s. Euro crosses, such as EUR-GBP ,EUR-CHF and EUR-JPY have also traded softer. The driver of recent gains has been a broad rotation lower in the dollar as markets priced in a 50 bp rate cut by the Fed at its upcoming March-18th meeting. U.S. Treasury yields hit record lows on Friday. The weaker dollar catalyzed a squeeze on euro short positions (the common currency had been trading at 34-month lows only a couple of weeks ago). The U.S. 10-year T-note yield advantage over the 10-year Bund yield narrowed by some 25 bp from mid February, 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 firmed during the Tokyo session, rebounding out of early weakness, while most Asian and developing-world currencies came back under pressure as markets took a more circumspect view of expected global monetary easing, with some narratives questioning the efficacy of such a policy response in the face of travel restrictions and other disruptions from virus containment efforts. G7 finance minister and central bank governors will be holding a conference call at 12:00 GMT (07:00 ET) today. Reuters reported that the draft statement doesn't specifically mention cutting interest rates. Stock markets in Asia have mostly gained today, though most came off the boil after AM session gains. S&P futures turned flat after the cash version of the index closed out yesterday on Wall Street with a solid 4.6%, partially reversing last week's plummet. USD-JPY, after lifting to a high at 108.53 in early Tokyo trading, turned lower, back below 108.00 and to an intraday low at 107.66. The range so far has been within yesterday's range. BoJ Governor Kuroda said on Monday that the central bank would take necessary steps to stabilise markets. Japan's February manufacturing PMI, released on Monday, 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. There is some scientific conjecture that the virus will weaken with time, possibility aided by the improving weather in the northern hemisphere.

    [GBP, USD]
    The pound has settled after register yesterday as the day's biggest loser out of the main currencies, dripping by about 1.5% loss to the euro. Cable has printed a low at 1.2746, but remained shy of the four-month low seen on Friday at 1.2726. EUR-GBP posted a 20-week high at 0.8741, and GBP-JPY descended into 20-month low terrain. The prime reason for the pound's recent underperformance is that the currency has found itself on the list of those vulnerable to a prolonged phase of risk aversion in global markets, given reliance on foreign investment to fund the UK's current account deficit (as a comparison, the pound dove 25% during the 2008-9 financial crisis). Another negative is uncertainty stemming from the UK government's seemingly uncompromising stance about post-Brexit trade with the EU, negotiations for which have started today. The government signalled 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 relative to other currencies. The UK government has admitted that the UK economy would likely only "grow 0.16% at best" by the middle of the next decade under a comprehensive trade deal with the U.S.

    [USD, CHF]
    EUR-CHF has ebbed back to the mid 1.0600s after yesterday rallying to a one-month peak at 1.0706, which extended a marked rebound from the near five-year low the cross posted on Friday, at 1.0585. The recent gains the cross has seen 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 has turned moderately higher after finding its feet following yesterday's 0.5%-plus drop, which left a six-day low at 1.3315. A continued rise in oil prices, which are up over 10% from yesterday's lows, should limit upside potential in USD-CAD. 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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