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By XE Market Analysis March 17, 2020 4:54 am
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    XE Market Analysis: Europe - Mar 17, 2020

    The dollar has outperformed while the yen has underperformed so far today, against a backdrop of rebounding European and U.S. equity index futures, and with Asian stock markets managing to lift out of early weakness. S&P 500 futures rallied by nearly 4% after the cash version of bellwether index crashed with a 11.98% loss yesterday on Wall Street, its worst fall since the infamous "Black Monday" of 1987. Pledges for massive fiscal intervention has followed the Fed's massive 100 bp rate cut and $750 bln re-start of QE. President Trump tweeted that "The United States will be powerfully supporting those industries, like Airlines others, that are particularly affected by the Chinese virus," many other nations have announced various plans of interventions to deal with the economic impact of social distancing, draconian travel restrictions, and other measures being taking to curtail the spread of the virus. Oil prices are up over 4%, but remain down by a massive over 53% on the year-to-date (WTI benchmark). How successful the policy responses will be in the face of lockdowns and the like remains to be seen. It seems clear now that there won't be a V-shaped recovery in markets and economic activity, similar to that seen in Asia during the 2003 SARS episode, as the coronavirus has proved much more adept at spreading exponentially than the SARS virus of 2003 did. Among the main currency pairings, USD-JPY rose by over 1% in posting a high at 107.17. The pair has remained shy of yesterday's high at 107.57. EUR-USD dropped back by around 0.5% in making a low at 1.1126, remaining well within the range seen over the last several days. AUD-USD lifted out of the 11-year lows seen yesterday.

    [EUR, USD]
    EUR-USD dropped back by around 0.5% in making a low at 1.1126, remaining well within the range seen over the last several days. What is notable is that the pair failed to sustained gains seen yesterday after the Fed slashed interest rates by a massive 100 bp, while revamping QE by the tune of $750 bln. EUR-USD hit a post-Fed high of 1.1237 before capping out. As we have been noting, recent gains in EUR-USD are not, in our opinion, the start of a bullish trend. The Eurozone is facing serious issues with both Italy and Spain amid nationwide lockdowns in the face of sharp rises in coronavirus cases. Some Italian banks at risk of failing, which threatens to hit the Eurozone financial system hard. This evolving backdrop, along with demand for cash dollars (to meet margin calls etc amid high volatility), should keep EUR-USD capped even as the coronavirus situation worsens in the U.S.

    [USD, JPY]
    The yen dropped by over 1% as safe-haven premiums unwound amid rebounding European and U.S. equity index futures, and with Asian stock markets managing to lift out of early weakness. S&P 500 futures rallied by nearly 4% after the cash version of bellwether index crashed with a 11.98% loss yesterday on Wall Street, its worst fall since the infamous "Black Monday" of 1987. Pledges for massive fiscal intervention has followed the Fed's massive 100 bp rate cut and $750 bln re-start of QE. President Trump tweeted that "The United States will be powerfully supporting those industries, like Airlines others, that are particularly affected by the Chinese virus," many other nations have announced various plans of interventions to deal with the economic impact of social distancing, draconian travel restrictions, and other measures being taking to curtail the spread of the virus. Oil prices are up over 4%, but remain down by a massive over 53% on the year-to-date (WTI benchmark). How successful the policy responses will be in the face of lockdowns and the like remains to be seen. It's seems clear now that there won't be a V-shaped recovery in markets and economic activity, similar to that seen in Asia during the 2003 SARS episode, as the coronavirus has proved much more adept at spreading exponentially than the SARS virus of 2003 did. The hope now is for a U-shaped recovery, and the fear is a L-shaped eventuality. USD-JPY rose by over 1% in posting a high at 107.17. The pair has remained shy of yesterday's high at 107.57. We expect the bias to remain to the downside, anticipating sub-100.00 levels.

    [GBP, USD]
    The pound has been trading in a distinct pattern during heightened phases of risk-off positioning, when it underperforms its major currency peers, including the dollar, euro, Swiss franc, and yen, while still gaining against the dollar bloc, and other commodity currencies and most developing world currencies (i.e. currencies with high beta characteristics). This pattern is likely to remain the case while risk aversion persists in global markets. Last week¡s 50 bp BoE rate cut and the government announcement of a massive GBP 30 bln fiscal spending plan didn't have much impact on the pound. Her Majesty's currency tends to find itself on the underperforming list of currencies during protracted periods of risk-off positioning in global markets, a consequence of the UK's dependence on foreign investment to fund its current account deficit. Despite the Fed's massive 100 bps emergency rate cut, Cable printed a fresh five-month low at 1.2192, with the desire for cash dollars remaining intense (investors are shunning even gold for a second consecutive week). EUR-GBP concurrently rallied to a six-month high, while GBP-JPY descended farther into six-month low terrain. Regarding the BoE, new government Andrew Bailey picked up the reins yesterday. His first Monetary Policy Committee meeting as governor will be on Wednesday and Thursday next week (announcing March 26th). A further 25 bps cut looks likely, which would take the repo rate to zero. An expansion in the QE program also looks likely.

    [USD, CHF]
    EUR-CHF has settled back under 1.0600, but remains above the five-year low that was seen last 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 has posted a fresh four-year high at 1.4027. Demand for cash U.S. dollars has been a factor today, offsetting a 4%-plus rebound in oil prices today, which, despite this, remain down by a massive over 53% on the year-to-date (WTI benchmark). The Canadian dollar and other dollar bloc currencies have been underperforming amid the recent backdrop of acute risk-aversion in global markets. 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. The Canadian dollar will remain subject to volatility and overall underperformance as long as the coronavirus contagion remains in a state of increasing spread.

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