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By XE Market Analysis March 19, 2020 5:27 am
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    XE Market Analysis: Europe - Mar 19, 2020

    The dollar remained firm amid a continuing backdrop of highly skittish global markets, while traditional safe havens, including U.S. Treasuries and many other sovereign bonds, and gold, have remained under pressure. Australian 10-year bonds has undergone its biggest three-day drop since 1987. Liquid, safe cash, and preferably in U.S. dollars, is what investors want right now amid a stampede to cover fund redemptions. Asian stock markets dropped sharply, and circuit breakers were hit in South Korea, the Philippines and Indonesia, though some markets managed to pare intraday losses, as did S&P 500 futures. The MSCI Asia-Pacific (ex-Japan) index shed 5% in posting a fresh four-year low. Policy responses continued to come. The RBA cut its cash rate 25 bp to a record low of 0.25% while announcing its first ever QE program. This was joined by fresh emergency central bank measures from the BoJ, Fed and ECB. Many countries have also been announcing massive rescue packages to counter the catastrophic economic consequences that global measures to contain the coronavirus is having. The concern remains that such efforts won't have much impact while major economies remain in lockdown, or partial lockdown. Markets also face the uncertainty of when the coronavirus will be beaten. A glimmer of hope has come from China, which reported no new locally transmitted cases for the first time. Among the main currencies, the dollar bloc have continued to underperform. The Canadian dollar joined the club of currencies and commodities trading at 17-year-plus lows, with USD-CAD climbing for what is now a 12th day out of the last 13 to a 1.4668 high. Oil prices, with which the Canadian currency correlates with, yesterday hit an 18-year low. The Australian dollar posted an 18-year low against the U.S. dollar, at 0.5511, while the New Zealand dollar hit fresh 11-year lows. USD-JPY lifted above 109.00, while EUR-USD and Cable have remained heavy, although above lows seen yesterday. The pound yesterday hit respective 11- and 35-year lows versus the euro and dollar.

    [EUR, USD]
    EUR-USD has remained heavy, although so far has remained above the one-month low seen yesterday at 1.0802. The pair has now unwound nearly all of the 5%-odd gains seen from late February through to the March-9th high at 1.1494 high. The decline has been driven by demand for dollars with investors in crisis-discombobulated markets stampeding to meet fund redemptions. Yield differentials and fundamentals have gone out of the window, for now. We expect EUR-USD to remain downwardly biased for now.

    [USD, JPY]
    The yen has for now given up its safe-haven crown to the dollar, which has been underpinned by investors wanting cash dollars to meet fund redemptions. USD-JPY has consequently rallied by over 6% from the 40-month low seen on March 9th at 101.19. The Japanese currency has also ebbed against the euro over this period, but has still managed gains versus many other currencies, including the pound, dollar bloc and most developing-world currencies. The BoJ today made two unscheduled bond purchases totalling 1.3 tln yen, which was one of several emergency measures taken by central banks during the Asian session today, including from the Fed, ECB and RBA. Assuming that the coronavirus continues to heighten for some months yet, which looks likely, we would expect the yen to return to favour as safe haven. Regarding the coronavirus, many countries have also been announcing massive rescue packages to counter the catastrophic economic consequences that global measures to contain the coronavirus is having. The concern remains that such efforts won't have much impact while major economies remain in lockdown, or partial lockdown. Markets also face the uncertainty of when the coronavirus will be beaten. A glimmer of hope has come from China, which reported no new locally transmitted cases for the first time.

    [GBP, USD]
    The pound has remained heavy, posting a fresh 11-year low against the euro, with EUR-GBP pegging a high at 0.9502. Cable's has remained heavy after yesterday posting a 35-year low at 1.1466. Sterling tends to find itself on the underperforming list of currencies during protracted periods of risk-off positioning in global markets is a consequence of the UK's dependence on foreign investment to fund its current account deficit. New BoE governor Andrew Bailey picked up the reins on Monday. 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]
    The Canadian dollar joined the club of currencies and commodities trading at 17-year-plus lows, with USD-CAD climbing for what is now a 12th day out of the last 13 to a 1.4668 high. Oil prices, with which the Canadian currency correlates with, yesterday hit an 18-year low. 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. The dollar bloc currencies 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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