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By XE Market Analysis March 9, 2020 5:11 am
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    XE Market Analysis: Europe - Mar 09, 2020

    The yen has surged by over 4% versus the commodity bloc currencies -- massive intraday movements by the standards of trading in the prevailing era -- as global markets slammed the risk-off button amid heightening panic about the global economic impact that the COVID-19 virus pandemic is having. Oil prices were slammed, diving by a staggering 30%-plus, with the WTI benchmark hitting a at $27.34 low. A price war has broken out between Saudi Arabia and Russia, with the former unleashing output in response's the the latter's intransigence about trimming supply at a time of falling demand. USD-CAD lifted over 1.5% to a 34-month at 1.3758, and more gains seem likely if oil prices sustained weakness, which would mark a significant deterioration in Canada's terms of trade. CAD-JPY fell to its lowest levels since November 2011. The Norwegian crown may be similarly affected. AUD-USD, meanwhile, dove to a fresh 11-year low at 0.6320, while AUD-JPY also descended farther into 11-year low territory. USD-JPY dove by over 3% to a 40-month low at 101.60, driven largely by safe haven demand for the Japanese currency. The dollar has been trading mixed, gaining versus the commodity currencies and most developing-world currencies, particularly those of export oriented economies, while losing ground to the euro and sterling. EUR-USD rallied 1.8% in posting a 13-month high at 1.1493, extending what has now been a 6.5% rebound from the 35-month low that was seen just 18 days ago at 1.0777. Ahead, the major "known unknown" remains how much the coronavirus spreads and how much economic damage from containment measures there will be be before it becomes clear that the virus is on the wane. These are good times to be a long-term value investor.

    [EUR, USD]
    EUR-USD rallied 1.8% in posting a 13-month high at 1.1493, extending what has now been a 6.5% rebound from the 35-month low that was seen just 18 days ago at 1.0777. The euro concurrently gained versus the dollar bloc and other currencies with higher beta characteristics amid a risk-off environment, and has also advanced versus the pound and other currencies. The gains in the common currency have been a consequence of risk-off positioning. The euro had been a popular funding currency of long global equity positions, due to the ECB's -0.50% base rate and the deep liquidity of the currency. These positions have been unwinding at pace in recent weeks. A concurrent dynamic has been the sharp narrowing in the U.S. yield advantage over its major peers, including the euor. The 10-year T-note over 10-year Bund yield spread has crashed to about 121-25 bp from a spread of about 200 bp in little over three weeks. We still view EUR-USD as being amid a sizeable rotation higher to a new trading band, and don't view this as the beginning of a long-term bull trend, which should become apparent once markets focus back in on fundamentals. There is little reason to believe that Eurozone will be able to better weather the consequences of the COVID-19 virus than the U.S. (the reverse has been true thus far, given the sizeable outbreak in Italy).

    [USD, JPY]
    The yen has surged by over 4% versus the commodity bloc currencies -- massive intraday movements by the standards of trading in the prevailing era -- as global markets slammed the risk-off button amid heightening panic about the global economic impact that the COVID-19 virus pandemic is having. Oil prices were slammed, diving by a staggering 30%-plus, with the WTI benchmark hitting a at $27.34 low. A price war has broken out between Saudi Arabia and Russia, with the former unleashing output in response's the the latter's intransigence about trimming supply at a time of falling demand. Major equity indices racked up losses of 5% and more, including S&P 500 futures. USD-JPY dove by over 3% to a 40-month low at 101.60, driven largely by safe haven demand for the Japanese currency. CAD-JPY fell to its lowest levels since November 2011, and AUD-JPY plunged farther into 11-year low territory. USD-JPY will remain headed south until markets have clarity that the peak of the COVID-19 virus spread has come and gone.

    [GBP, USD]
    The pound, which has weakened against its main peers since Boris Johnson's Conservative Party convincingly won the election in December, will likely remain on the underperforming list. The currency has an historical tendency to underperform its main peers amid prolonged phases of risk aversion in global markets, given the reliance on foreign investment to fund the UK's current account deficit. Given the uncompromising signals the UK government has sent, along with the limited time frame, there is also a risk that the UK leaves the end of the post-Brexit transition period (at the end of 2020) without a new trading deal with the EU, at which time the country will shift to less favourable WTO trading terms.

    [USD, CHF]
    EUR-CHF printed a fresh five-year low at 1.0509, reflecting safe haven demand for the Swiss currency as concerns rise about the global economic disruptions being caused by efforts to contain the COVID-19 virus. 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 lifted over 1.5% to a 34-month at 1.3758, and more gains seem likely if oil prices sustained weakness, which would mark a significant deterioration in Canada's terms of trade. CAD-JPY fell to its lowest levels since November 2011. Oil prices were slammed today, diving by a staggering 30%-plus, with the WTI benchmark hitting a at $27.34 low. A price war has broken out between Saudi Arabia and Russia, with the former unleashing output in response's the the latter's intransigence about trimming supply at a time of falling demand.

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