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By XE Market Analysis March 13, 2020 5:18 am
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    XE Market Analysis: Europe - Mar 13, 2020

    The yen weakened as safe haven premiums unwound as Asian stock markets pared steep early losses and U.S. and European index futures rebounded. Oil prices, along with base metals and other commodities, also rose, while yields of top grade government bonds lifted. Liquidity injections by the Fed in the U.S., the RBA in Australia, and many others, including an unscheduled Y200 bln bond buying operation by the BoJ, along with hopes for major stimulus packages in the U.S., Japan and elsewhere, have given markets a toehold in an abyss of panic. Japan's economy minister pledged today "bold and unprecedented steps" are in the works to counter the impact of the coronavirus, though this didn't prevent Nikkei 225 closing with a 6.1% loss, which made it an underperformer in Asia. S&P 500 futures have rebounded by over 4% after the cash version of the index closed with a loss of 9.5% -- its biggest plummet since the crash of 1987 and its fifth biggest one-day percentage drop on record. In the forex realm, USD-JPY rallied by 1.2% in making a 106.03 peak, which is 4 pips shy of yesterday's peak. While the yen is registering as the weakest of the main currencies, the dollar bloc are registering as the strongest. The biggest gainer, not surprisingly, has been the AUD-JPY cross, which had been the biggest loser amid the recent global stock market rout. The cross is showing a 2.2% gains, despite being about 30 pips off its highs. CAD-JPY and NZD-JPY are also up strongly, by about 1.7-1.8%. AUD-USD lifted by about 1%, making a high at 0.6327 after yesterday posting an 11-year low at 0.6215. Elsewhere, EUR-USD held a narrow range near 1.1190, comfortably above the 11-day low seen yesterday at 1.1056. Cable also managed to find a footing after dropping quite sharply over the last three days. Assuming the coronavirus continues to spread exponentially, which is what the epidemiologists are warning, global markets are likely to ensure further panicky risk-off phases.

    [EUR, USD]
    EUR-USD held a narrow range near 1.1190, comfortably above the 11-day low seen yesterday at 1.1056. The low was seen after the ECB announced a raft of policy easing measures yesterday, which offset expectations for a massive 100 bps Fed rate cut at its upcoming March 17th-18th FOMC meeting. There is nnother reason for the dollar's return to perkiness, and that is the dollar itself is a safe haven currency, given the underpinning of the biggest most liquid triple-A sovereign bond market in the world. The reason for the dollar's recent several-week phase of underperformance stemmed from a dynamic in EUR-USD, specifically the unwinding of euro shorts that had been used as funding for carry trades during the good times of record stock market heights. This force, which lifted EUR-USD about 5% higher from the 35-month sub-1.0800 lows that were seen on February 20th, has now ran dry at a time when Eurozone's fundamentals are starting to look ugly. The nationwide lockdown in Italy is a major concern. BTP yields have surged in recent sessions with the nation facing debt refinancing amid forecasts that the world's eighth biggest economy is heading for a deep and long-lasting recession.

    [USD, JPY]
    The yen weakened as safe haven premiums unwound as Asian stock markets pared steep early losses and U.S. and European index futures rebounded. Oil prices, along with base metals and other commodities, also rose, while yields of top grade government bonds lifted. Liquidity injections by the Fed in the U.S., the RBA in Australian, and many others, including an unscheduled Y200 bln bond buying operation by the BoJ, along with hopes for major stimulus packages in the U.S., Japan and elsewhere, have given markets a toehold in an abyss of panic. Japan's economy minister pledged today "bold and unprecedented steps" are in the works to counter the impact of the coronavirus, though this didn't prevent Nikkei 225 closing with a 6.1% loss, which made it an underperformer in Asia. S&P 500 futures have rebounded by over 4% after the cash version of the index closed with a loss of 9.5% -- its biggest plummet since the crash of 1987 and its fifth biggest one-day percentage drop on record. In the forex realm, USD-JPY rallied by 1.2% in making a 106.03 peak, which is 4 pips shy of yesterday's peak. While the yen is registering as the weakest of the main currencies, the dollar bloc are registering as the strongest. The biggest gainer, not surprisingly, has been the AUD-JPY cross, which had been the biggest loser amid the recent global stock market rout. The cross is showing a 2.2% gains, despite being about 30 pips off its highs. CAD-JPY and NZD-JPY are also up strongly, by about 1.7-1.8%.

    [GBP, USD]
    The pound has been trading mixed amid the recent high volatility in global markets. Amid this general theme, has been recent marked weakness against the dollar, aided by the BoE's 50 bp rat cut this week, which was a largely unexpected intra-meeting emergency move. This took the repo rate to 0.25%. Cable has printed a five-day low at 1.2492 yesterday, since settling back around the 1.2600 level but remaining well over 3% down on the week. The government backed-up the BoE's rate cut with a massive GBP 30 bln fiscal spending plan, which was detailed during its 2020-21 budget presentation before parliament on Wedensday, though this didn't have much supportive impact on the pound, a currency that tends to find itself on the underperforming list of currencies during protracted periods of risk aversion in global markets (given the UK's dependent on foreign investment to fund its current account deficit). The BoE stated that "Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months." The BoE also introduced a new term funding scheme for small businesses, offering four-year funding over the next 12 months, while the central bank’s Financial Policy Committee also lowered the counter-cyclical capital buffer for banks to zero from 1%. Going forward, we expect the pound to be prone to underperformance. With the UK and Eurozone at risk of recession, this is not a good time for trade negotiations between the UK and EU, and the UK's desire to leave the post-Brexit transition membership of the EU's single market and customs union at the end of the year.

    [USD, CHF]
    EUR-CHF has settled back under 1.0600, but remains above the five-year low that was seen on Monday at 1.0505. Safe haven demand for the Swiss currency has returned amid heightening concerns about the global economic disruptions being caused by efforts to contain the coronavirus. 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 is amid its first down day in 11 days as the Canadian dollar and other commodity currencies manage a rebound amid a hiatus in the panicky risk-off positioning seen in global markets this week, aided by expectations for big policy responses. Oil prices have managed a 3%-plus gain, though prices remains sharply down following the worst-in-nearly-three-decades 30%-plus crash on Monday. Sustained declines in oil prices erode Canada's terms of trade, which is the causation link of the Canadian currency's correlation with crude markets. USD-CAD has dropped to a 1.3825 low, correcting from the four-year high seen at 1.3963 yesterday. The Canadian dollar will 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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