Home > XE Currency Blog > XE Market Analysis: Europe - Mar 05, 2020

AD

XE Currency Blog

Topics7152 Posts7197
By XE Market Analysis March 5, 2020 3:36 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5076
    XE Market Analysis: Europe - Mar 05, 2020

    Relatively narrow ranges have been seen so far today among the main currencies, which marks something of a contrast by recent choppy standards. The dollar's on-the-fact rebound following the Fed's 50 bp rate cut on Monday, which had been discounted, albeit coming sooner than expected, has run out of steam with positioning in the Fed funds market fully factoring in a follow-up 25 bp easing at the approaching March-18th FOMC meeting, which would wipe out the three quarter-point hikes of 2019. The narrow trade-weighted USD index (DXY) has settled near 97.30-35, below yesterday's rebound high at 97.59. The index printed a two-month low at 96.98 in the immediate wake of the Fed's move on Monday. EUR-USD has concurrently settled in the lower 1.1100s, above yesterday's low at 1.1095 and below Monday's two-month peak at 1.1213. Stock markets in Asia have rallied after the main U.S. indices close on Wall Street with solid 4%-plus gains. European index futures are also up, while S&P 500 futures are showing a modest decline. Oil prices are firmer, though off from recent highs, into a meeting of OPEC members today, who are expected to vote for a cut in supply quotas. On the COVID-19 virus front, California has declared a state of emergency, which will bring more economic disruption as measures to contain the virus are implemented, though there so far hasn't been a sudden flare-up in confirmed cases outside China, South Korea, Japan, Iran, and Italy. Elsewhere among currencies, USD-JPY edged out a two-day high at 107.74 in early Tokyo before ebbing back below 107.50. AUD-USD edged out a two-day peak, at 0.6634, before ebbing back. USD-CAD remained buoyant following the BoC's 50 bp rate cut yesterday, but remained off recent highs.

    [EUR, USD]
    EUR-USD has settled in the lower 1.1100s, above yesterday's low at 1.1095 and below Monday's two-month peak at 1.1213. The dollar's on-the-fact rebound following the Fed's 50 bp rate cut on Monday, which had been discounted, albeit coming sooner than expected, has run out of steam with positioning in the Fed funds market fully factoring in a follow-up 25 bp easing at the approaching March-18th FOMC meeting, which would wipe out the three quarter-point hikes of 2019. The narrow trade-weighted USD index (DXY) has settled near 97.30-35, below yesterday's rebound high at 97.59. The index printed a two-month low at 96.98 in the immediate wake of the Fed's move on Monday. The 10-year U.S. T-note yield advantage over the 10-year Bund has dropped from around 200 bp to around 162-3 bp in little more than two weeks. This has driven the shift higher in EUR-USD, which had in February been trading at 34-month lows. We don't expect EUR-USD gains to be a one-way street, viewing recent gains as a rotation higher rather than a trend following opportunity. 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. The U.S. Treasury market remains a top safe haven for global capital (being liquid, safe and positively yielding). Markets will continue to monitor the relative impact of the corona virus, and efforts to contain it, between the U.S. and Eurozone.

    [USD, JPY]
    USD-JPY edged out a two-day high at 107.74 in early Tokyo before ebbing back below 107.50. The pair is amid a consolidation after dropping from levels above 112.00 over the last couple of weeks, driven in part by markets discounting Fed easing and in part by safe haven demand for the Japanese currency, along with repatriation of overseas capital by Japanese investors as fears mount about the global economic disruption causes by measures being taken to contain the COVID-19 virus. California yesterday declared a state of emergency, which will bring more economic disruption as measures to contain the virus are implemented, though there so far hasn't been a sudden flare-up in confirmed cases outside China, South Korea, Japan, Iran, and Italy. 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, indicating continued contraction in the sector. 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 staged a rebound from lows over the last three days, though still retains an average loss of nearly 3% relative to the dollar, euro and yen on the year so far. This follows a recent phase of underperformance, seen partly on the risk of the UK leaving the end of the post-Brexit transition period at the end of the year without a new trading deal with the EU, and partly as the currency found itself on the list of those vulnerable to a prolonged phase of risk aversion in global markets, given the 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). The final UK composite PMI for February was revised a notch lower to a reading of 53.0 from the preliminary figure of 53.3, declining from January's reading of 53.3. The median forecast had been for an unchanged preliminary reading, of 53.3. Driving the decline were downward revisions to both the manufacturing and services PMIs from preliminary figures. The survey showed companies reporting an upturn in business activity from receding political uncertainty along with strong domestic demand. Markit highlighted that impact of the coronavirus outbreak didn't show up in the report, but is likely to in March data, with the disruptions in global supply chains and an erosion in confidence already impacting economic activity in the UK ecnonomy.

    [USD, CHF]
    EUR-CHF has ebbed back to the mid 1.0600s with recent gains having stalled above 1.0700. A one-month peak was logged at 1.0710 on Monday, 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. 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 remained buoyant following the BoC's 50 bp rate cut yesterday, but remained off recent highs. The pair had last week posted a nine-month high at 1.3464, which was the culmination of a rally from the sub-1.3000 levels that were seen in early January. Oil prices are firmer today, though off recent highs, into a meeting of OPEC members today, who are expected to vote for a cut in supply quotas. 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.

    Paste link in email or IM