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By XE Market Analysis March 26, 2020 5:35 am
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    XE Market Analysis: Europe - Mar 26, 2020

    ..and, back to a risk-averse trading pattern in currencies after a couple of days of reprieve, with the yen back to outperformance and commodity and developing-world currencies to underperformance. The dollar has firmed up against the latter two groups, but has lost ground to the yen and even the euro thanks to the Fed's spigot of unlimited greenbacks that is keeping the U.S. currency on a generally softer profile. The global stock market rebound faltered in Asia, and S&P 500 futures have more than reversed the 1.15% closing gain that the cash version of the index saw yesterday on Wall Street. Oil prices have rotated over 3.5% lower, though gold prices have softened, indicating that stressed asset managers may still be looking to raise cash (there is a view, similar to the pattern seen in the 2008-9 financial crisis, that gold will in time return as a safe haven, with potential to rally strongly should, as looks likely, the crisis persists). Overall, there is seems to be a feeling among market participants that asset markets may be entering a stasis-at-much-lower-levels phase following the historically sharp declines in recent weeks, which could mean that currencies are set for a choppy consolidation period. The fact that factories have been returning to operations in China only to downsize staffing levels due to the plummet in global demand shows that all the stimulus in the world simply won't be able to make for the widespread lockdowns in global economies while they last.

    [EUR, USD]
    EUR-USD has lifted for what is now a fifth consecutive day, buoyed by the billowing cushion of unlimited Fed supply of dollars. The pair clocked a one-week high at 1.0940, and needs to close above 1.0882-83 today to maintain the nascent run of successively higher closing levels. Given the Fed's commitment, we expect EUR-USD to remain underpinned.

    [USD, JPY]
    The yen has firmed amid renewed richening in safe haven premiums, though remains below recent peaks (well below in the case against the dollar). USD-JPY has posted a two-day low at 110.14. The global stock market rebound faltered in Asia, and S&P 500 futures have more than reversed the 1.15% closing gain that the cash version of the index saw yesterday on Wall Street. Oil prices have rotated over 3.5% lower. Overall, there is seems to be a feeling among market participants that asset markets may be entering a stasis-at-much-lower-levels phase following the historically sharp declines in recent weeks, which could mean that currencies are set for a choppy consolidation period. The fact that factories have been returning to operations in China only to downsize staffing levels due to the plummet in global demand shows that all the stimulus in the world simply won't be able to make for the widespread lockdowns in global economies while they last.

    [GBP, USD]
    The pound has capped out following two days of outperformance. Cable yesterday left an eight-day high at 1.1976, since settling to the lower 1.1900s. The pairing is still showing a sizeable 10.0% decline on the year-to-date. The pound also remains down by 8.5%-9% versus the euro and yen over this period. 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. 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 has remained heavy despite a 3%-plus rotation low in oil prices today. 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 has been having some impact in helping markets finds a sustainable reprieve.

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