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By XE Market Analysis March 10, 2020 4:43 am
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    XE Market Analysis: Europe - Mar 10, 2020

    A risk-back-on vibe saw the yen weaken and sovereign bond yields rise from record lows as markets re-priced safe haven currencies and assets, while commodity currencies and many developing world currencies rebounded concomitantly with Asian stock markets and many commodities from lows seen yesterday. Hopes for coordinated fiscal and monetary stimulus from major economies, along with news that new virus cases slowed again in China, enabled market participants to take stock following the panic of yesterday. Oil prices also rallied, and were up by around 8% at the highs, though still down markedly following yesterday's 30%-plus dive. USD-JPY rallied to a high of 105.04, extending a rebound from yesterday's 40-month low at 101.21. The pair subsequently settled back to the upper 103.0s, but was still showing a net gain on the day of about 1.5%. CAD-JPY, yesterday's biggest decliner out of the main dollar pairings and associated cross rates, reverted to the biggest gainer today, and was showing a 2% gain despite having come off by a big figure from its rebound high (as of the early AM session in London). AUD-JPY also lifted after posting an 11-year low yesterday, and other yen crosses also gained. AUD-USD extended a rebound from levels not seen since 2009. USD-CAD was aided lower by the rebound in oil prices. The pair dipped by over 0.5% to an intraday low at 1.3606 before settling around 1.3650, still up well up on Friday's close at 1.3424. The dollar managed to recoup ground lost to the euro and sterling. EUR-USD dropped to a 1.1332 low, putting in some space from yesterday's 13-month high at 1.1493, subsequently settling back in the upper 1.1300s. Ahead, more volatility and more risk-off phases seem more likely than not. The COVID-19 virus clearly remains amid global expansion, and many countries have switched to delay strategies rather than containment strategies. The virus should naturally weaken as time goes on.

    [EUR, USD]
    EUR-USD dropped to a 1.1332 low, putting in some space from yesterday's 13-month high at 1.1493, subsequently settling back in the upper 1.1300s. Over the last several weeks, the dollar has been in decline, driven by the fact that U.S. Treasury yields have much greater scope to fall than Bund yields, which has been reflected by sharply narrowing Treasury versus Bund yield spreads. This has undermined the dollar, while recent euro 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. 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]
    A risk-back-on vibe saw the yen weaken and sovereign bond yields rise from record lows as markets re-priced safe haven currencies and assets, while commodity currencies and many developing world currencies rebounded concomitantly with Asian stock markets and many commodities from lows seen yesterday. Hopes for coordinated fiscal and monetary stimulus from major economies, along with news that new virus cases slowed again in China, enabled market participants to take stock following the panic of yesterday. Oil prices also rallied, and were up by around 8% at the highs, though still down markedly following yesterday's 30%-plus dive. USD-JPY rallied to a high of 105.04, extending a rebound from yesterday's 40-month low at 101.21. The pair subsequently settled back to the upper 103.0s, but was still showing a net gain on the day of about 1.5%. CAD-JPY, yesterday's biggest decliner out of the main dollar pairings and associated cross rates, reverted to the biggest gainer today, and was showing a 2% gain despite having come off by a big figure from its rebound high (as of the early AM session in London). AUD-JPY also lifted after posting an 11-year low yesterday, and other yen crosses also gained. The COVID-19 virus clearly remains amid global expansion, and many countries have switched to delay strategies rather than containment strategies. The virus should naturally weaken as time goes on.

    [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 recouped to around the 1.0600 level after yesterday printing a five-year low at 1.0509, which was a product of safe haven demand for the Swiss currency amid heightened concerns about the global economic disruptions being caused by efforts to contain the COVID-19 virus. Promises by global leaders for coordinated fiscal and monetary policy stimulus, along with news that the new cases count of the coronavirus in China have continued to decline, have helped settle markets today, seeing the franc lose some of its haven premium. 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 was aided lower by a rebound in oil prices. The pair dipped by over 0.5% to an intraday low at 1.3606 before settling around 1.3650, still up well up on Friday's close at 1.3424. Oil prices were up by around 8% at the rebound highs earlier, though still down markedly following yesterday's 30%-plus dive. The Canadian dollar 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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