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By XE Market Analysis March 25, 2020 4:34 am
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    XE Market Analysis: Europe - Mar 25, 2020

    The commodity and many developing world currencies have continued to rebound, while the dollar, yen and Swiss franc have traded generally softer. This comes with Asian stock markets rallying after the DJIA equity index posted its biggest single-day rally on Wall Street since 1933. The U.S. Senate and White reached agreement on a $2 tln fiscal stimulus package, which joins a growing list of countries around the world to have unveiled bazooka-sized spending packages, joining ambitious central bank monetary stimulus efforts aimed at mitigating the impact of virus containing measures. This comes amid tentative signs that the lockdown in Italy is starting to work, as new cases and the death rate ebb. There are also other signs of encouragement, such as news that 20% of U.S. companies in China have reported that they have returned to normal operations, showing that there is economic life after lockdown. Among the main currencies, USD-JPY has traded neutrally so far today, while most yen crosses, especially those with a commodity or developing world currency counterpart, have lifted. USD-JPY has held with a range of 110.75-111.50, narrow by recent standards and well within the bounds of yesterday's range. EUR-JPY has posted modest gains, but remained below yesterday's peak. AUD-JPY, NZD-JPY and CAD-JPY, meanwhile, have seen gains of between 0.8% and 1.0%. AUD-JPY, amid its fifth consecutive up day, posted a 10-day high at 67.25. AUD-USD lifted by 1.2% in printing an eight-day high at 0.6047, extending the rebound from last week's 18-year low to just shy of 10%. USD-CAD fell to a five-day low at 1.4332, with the Canadian dollar continuing to correlate closely with oil prices, which today extended over 3% higher to five-day highs. EUR-USD has traded modestly higher, to the lower 1.0800s, but has remained comfortably within Tuesday's range.

    [EUR, USD]
    EUR-USD has traded modestly higher, to the lower 1.0800s, but has remained comfortably within Tuesday's range. The pair yesterday printed a five-day high at 1.0889, and is, on a daily closing level basis, amid its four consecutive day of ascent. A close today above 1.0789-90 is needed to maintain this nascent trend, which has been a product of the Fed's ultra-aggressive pledge of unlimited dollar supply. Given the Fed's commitment, we expect EUR-USD to remain underpinned.

    [USD, JPY]
    USD-JPY has traded neutrally so far today, while most yen crosses, especially those with a commodity or developing world currency counterpart, have lifted, with Asian stock markets gaining after Wall Street closed with its best single-day gains since 1933 as countries around the world unveil bazooka fiscal spending packages to join huge central bank monetary stimulus efforts aimed at mitigating the impact of virus containing measures. USD-JPY has held with a range of 110.75-111.50, narrow by recent standards and well within the bounds of yesterday's range. EUR-JPY has posted modest gains, but remained below yesterday's peak. AUD-JPY, NZD-JPY and CAD-JPY, meanwhile, have seen gains of between 0.8% and 1.0%. AUD-JPY, amid its fifth consecutive up day, posted a 10-day high at 67.25. Ahead, significant uncertainties remain. All the stimulus in the world isn't going to re-start the global economy while national lockdowns -- which now cover a third of the world's population -- persist. While we can conjecture how long these lockdowns will last, it remains, as yet, hard to know what risk there will be of a second wave of infection once they are lifted, or will countries, once their medical services have been bolstered (with widespread testing, more respirators, a full supply of coronavirus-grade face masks etc) will opt to get back to work, such as President Trump has been mooting, and if so, how effective and how publicly acceptable this would be. From here, we still anticipate further risk-off positioning in markets. We are anticipating sub-100.00 levels will be seen in USD-JPY, aided by the Fed's unlimited tap of dollars via money market liquidity operations and QE activity.

    [GBP, USD]
    Sterling has managed a decent rebound over the last day, gained versus all of the other major currencies (being the dollar, euro, yen and Swiss franc). We have been noting that the UK currency had been trading similar to a commodity currency lately, significantly underperforming its major-currency peers during phases of acute risk-off positioning, so it shouldn't be too surprising to see the pound outperform during the rebounds. Cable has printed a high at 1.1839, which is a five-day peak and marks a gain of over 4 big figures from the 35-year low that was seen on Friday, at 1.1409. The pairing is still showing a whopping 10.5% decline on the year-to-date. The pound also remains down by around 8% versus both the euro and yen over this period. The currency is vulnerable to sustained periods of risk-aversion in global markets due to the UK's large current account deficit, particularly the part of it derived from foreign investors in UK assets, which dwarfs UK investors foreign investments and sets up an imbalance when it comes to capital repatriation. Then there is Brexit -- with Boris Johnson's government still aiming to take the UK out of its special transition membership of the EU's customs union and single market at the end of the year, which would put a large part of UK trade on less favourable WTO terms (we think Johnson will ultimately opt for an extension in the transition period). The BoE's Monetary Policy Committee meets today and tomorrow, when it will release the minutes from last week's decision to cut the repo to 0.1% and expand QE. The UK government is implementing an aggressive stimulus package to counter the impact of virus-containing measures, billed as an "employment retention" coronavirus support package, which aims to keep the economy primed for a V-shaped rebound by paying up to 80% of employees pay in businesses that have been forced to suspend trade.

    [USD, CHF]
    EUR-CHF has nudged above 1.0600 as a modicum of risk appetite returns to global markets, which has seen the price premiums of safe havens such as the Swiss franc fall back. The gains put a little extra distance in from the five-year low that was seen on March 9th at 1.0505. 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 fell to a five-day low at 1.4332, with the Canadian dollar continuing to correlate closely with oil prices, which today extended over 3% higher to five-day highs. The Canadian dollar and other commodity currencies will continue to remain subject to volatility and overall underperformance as long as the coronavirus contagion remains in a state of increasing spread, though the plethora of global monetary and fiscal responses to the coronavirus induced economic dislodgements appear to be having some impact in helping markets finds a sustainable reprieve.

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