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By XE Market Analysis March 23, 2020 5:01 am
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    XE Market Analysis: Europe - Mar 23, 2020

    The familiar risk-off positioning pattern has been seen among currencies, with the yen outperforming while the commodity and many developing nation economies, especially those of export orientated economies and/or with high dollar borrowing, underperformed. The dollar rallied across-the-board (even against the yen) at the opening of trading before paring those gains. Asia stock markets racked up sizeable declines while S&P 500 futures hit 5% limit-down. The failure of a procedural vote on Sunday in the U.S. Senate to pass the massive $1.8 tln coronavirus economic rescue bill worried markets, coming as new confirmed virus cases surge and amid concerns about the slow pace of making testing widely available in America. Gold prices managed to gain, as did U.S. Treasuries, which have sent the 10-year T-note yield down over 6 bp, contrary to the recent risk-off pattern, suggesting that the demand for cash dollars has waned. USD-JPY, after initially popping up by about 45 pips to a 111.26 high, dropped back to a 109.67 low before settling in the lower 110.0s. The pairing has so far remained within Friday's range. The narrow trade-weighted USD index (DXY) rallied by just over 100 pips in making a 102.97 peak before turning lower and more than reversing these gains in posting a low at 101.84. The index subsequently settled around 102.30-35, which is about 0.4% up on Friday's closing level. The dollar remained shy of the 38-month high that was seen on Friday at 102.99. EUR-USD tested Friday's 35-month low at 1.0637 before rebounding to a 1.0768 high and then settling back under 1.0700. The biggest losers among the main currencies have been the dollar bloc. Of these, the NZD has been hardest hit after the RBNZ announced a NZ$ 30 bln QE program. NZD-USD hit a 0.5594 low, but remained above the 11-year low seen last week. NZD-JPY was showing a 1.5% gain as of early London trading, although 40 pips above its lows.

    [EUR, USD]
    EUR-USD tested Friday's 35-month low at 1.0637 before rebounding to a 1.0768 high and then settling back under 1.0700. Broader movements in the dollar have continued to drive EUR-USD. The narrow trade-weighted USD index (DXY) rallied by just over 100 pips in making a 102.97 peak before turning lower and more than reversing these gains in posting a low at 101.84. The index subsequently settled around 102.30-35, which is about 0.4% up on Friday's closing level. The dollar remained shy of the 38-month high that was seen on Friday at 102.99. This came amid a backdrop of acute risk-off positioning. One thing has has been notable today is that gold prices have managed to gain, as have U.S. Treasuries, which sent the 10-year T-note yield down over 6 bp, contrary to the recent risk-off pattern, suggesting that the demand for cash dollars has waned. The demand for cash was high recently as stresses fund managers stampeded to gather enough to cover fund redemptions. We still anticipate EUR-USD to remain directionally biased to the downside, with aggressive coronavirus containment measures remaining in the upswing and likely to keep global markets under pressure, in turn feeding demand for dollars.

    [USD, JPY]
    The yen has been outperformed today. USD-JPY, after initially popping up by about 45 pips to a 111.26 high, dropped back to a 109.67 low before settling in the lower 110.0s. The pairing has so far remained within Friday's range. This comes amid a familiar risk-off positioning pattern has been seen among currencies, with the Japanese currency strengthening while the commodity and many developing nation economies, especially those of export orientated economies and/or with high dollar borrowing, underperformed. The failure of a procedural vote on Sunday in the U.S. Senate to pass the massive $1.8 tln coronavirus economic rescue bill worried markets, coming as new confirmed virus cases surge and amid concerns about the slow pace of making testing widely available in America. 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 managed to find a footing after a phase of pronounced underperformance versus the dollar, euro and yen. The UK currency has been performing similar to commodity currency during the recent phases of acute risk-off positioning, Cable last week pegged 35-year at 1.1451, and an 11-year low in the case against the euro. The UK runs a relatively big current account deficit, and this exposes the currency during heightened risk aversion. We saw this during the 2008 crisis, with BoE's real effective exchange rate measure of the pound tumbled by 16% in the three months following the collapse of Lehman Brothers in September 2008. During times of high stress, the net investment flow -- what is needed to finance the deficit -- turns from being UK-inward to UK-outward. Some market narratives have also been mooting that Brexit has rendered the pound more vulnerable. New BoE governor Andrew Bailey last week (his first week as governor) guided the central bank to cutting the repo rate to a record low 0.1% while expanding its QE program. This came with the UK government announcing a GBP 330 bln coronavirus rescue package. Assuming the peak point of aggressive coronavirus containment measures has yet to bet seen, and given concerns that stimulus and rescue measures may have limited impact in the face of nationwide lockdowns, the pound may yet see further bouts of weakness.

    [USD, CHF]
    EUR-CHF remains settled under 1.0600 while remaining above the five-year low that was seen on March 9th 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. The Swiss central bank kept its policy rates unchanged at -0.75% last week following its quarterly policy meeting, as had been widely expected. The SNB acknowledged the impact of virus developments, which also put upward pressure on the franc, and pledged that it will step up forex interventions to keep the currency under control. The central bank said growth will be likely be negative this year, and that it is considering to reduce the countercyclical capital buffer (the German equivalent of this was cut to zero yesterday). The exemption threshold for the negative rates will be lifted, and while the SNB stressed that the banking system has sufficient liquidity for now, policymakers also emphasized that it will ensure that this stays like that. There are reports that the SNB is in talks with commercial banks, and that there may be announcements on additional steps later in the week or over the weekend.

    [USD, CAD]
    USD-CAD has remained buoyant although off recent highs. Global markets continue to be more often in a state of risk-off positioning, and acute risk-off at that, than the opposite, or in something like a neutral stasis, which is keeping the Canadian dollar on the "short" list. Oil prices, with which the Canadian currency correlates with, have steadied above the 18-year lows that were seen last week, but prices remained down by over 65% from the early January highs. The plethora of monetary and fiscal responses to the coronavirus induced economic dislodgements have had little impact so far in helping markets finds a sustainable reprieve. The dollar bloc currencies will continue to remain subject to volatility and overall underperformance as long as the coronavirus contagion remains in a state of increasing spread.

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