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By XE Market Analysis March 30, 2020 4:09 am
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    XE Market Analysis: Europe - Mar 30, 2020

    The dollar has traded steady-to-firmer against the other main currencies so far today. Influenced by a 0.5% decline in EUR-USD, the narrow trade-weighted USD index (DXY) lifted to a 98.92 high, over 50 pips up on Friday's closing level and setting the index up for its first daily gain since last Monday. The yen has also traded firmer versus most currencies, especially the European units, which have underperformed moderately. The dollar bloc currencies are modestly lower, despite a backdrop of sputtering stock markets in Asia, which was offset by a 0.7% gain in S&P 500 futures, rebounding after the cash version of the index closed with a 3.4% loss on Friday. USD-JPY edged out a 12-day low at 107.14 before recouping to the upper 107.0s. AUD-USD, like other pairings, has held a relatively narrow range by recent standards, of 0.6113 - 0.6184, holding below Friday's two-week high at 0.6202. USD-CAD made time just above 1.4000 and Friday's two-week low at 1.3920. Oil prices tumbled again. Front-month WTI prices hit a low at $19.92, which is the lowest level since March 20th, when crude prices hit a their lowest since 1999 (in nominal terms). The euro, sterling and Swiss franc have underperformed so far today posting declines of around 0.5% against the dollar. EUR-USD posted a low at 1.1069 after closing on Friday at 1.1148-50. A close today below the latter levels would mark the first down day the pairing has seen since March 19th. Overall, currency pairings have remained within recent ranges, and global markets have traded relatively calmly so far today. The major concern remains that the massive global stimulus efforts announced to-date simply won't be able to offset the full consequences of economies being in a frozen state of lockdown, a situation that looks likely to endure for several months. JP Morgan is currently forecasting world GDP to contract by 10.5% in the first half of the year alone.

    [EUR, USD]
    EUR-USD posted a low at 1.1069 after closing on Friday at 1.1148-50. A close today below the latter levels would mark the first down day the pairing has seen since March 19th. The narrow trade-weighted USD index (DXY) concomitantly lifted to a 98.92 high, over 50 pips up on Friday's closing level and setting the index up for its first daily gain since last Monday. The recent pronounced narrowing in the dollar's yield advantage over the Eurozone, driven by the Fed's aggressive monetary policies, looks to have based out for now. The U.S. 10-year T-note versus Bund yield differential based last Wednesday at 110.5 bp, and has since lifted back towards 120.0 bp. This has helped EUR-USD come off the boil. Bigger picture, the relative political and economic impact of virus-containing measures being taken looks to be greater in Europe than the U.S. The countries hardest hit by the virus in Europe -- Italy, Span and France -- have the least fiscal room for manoeuvre, and the issue of the viability of the euro and EU is once again being held in doubt by Euroskeptics. Fundamentally, we remain bearish of EUR-USD.

    [USD, JPY]
    The yen has traded firmer versus most currencies, especially the European units, which have underperformed moderately. USD-JPY edged out a 12-day low at 107.14 before recouping to the upper 107.0s. Risk appetite has neither been here nor there, though a negative sentiment looks to be building. Asian stock markets sputtered, while S&P 500 futures turned negative after trading in the black earlier. This should lift safe haven premiums in global markets, and so keep the yen generally bid, though flows into tomorrow's month- and quarter-end, along with Japanese fiscal year ending, may generate some choppy price action. The major concern remains that the massive global stimulus efforts announced to date simply won't be able to offset economies in a frozen state of lockdown, a situation that looks likely to endure for several months. JP Morgan is currently forecasting world GDP to contract by 10.5% in the first half of the year alone. The exponential rate of new coronavirus cases globally has continued. Cases in the U.S. have surged, and it might be several weeks before the benefits of the global lockdown are seen. Few are now expecting a V-shaped economic recovery out of this, such as was seen following the SARS epidemic in Asia in 2003. The only question is how wide the "U" with be in a U-shaped recovery. We continue to anticipate USD-JPY trading at sub-100.00 levels.

    [GBP, USD]
    Cable is softer today after rallying last week. The pair posted a 17-day high at 1.2486 on Friday, which was the culmination of a rebound from the 35-year low that was seen on March 20th at 1.1409. About two thirds of the rebound reflected the broader turn lower the dollar, at the influence of the Fed's policies, while the broad stabilization in global markets last week gave the pound a chance to rebound, having underperformed markedly during the recent acute periods of risk aversion. Despite the impressive rebound, the pound still remained, at levels prevailing in the early London session today, down 7% versus the dollar on the year-to-date, and by 6% and 7.5% down against the euro and yen, respectively, over the same period. We expect the pound to remain vulnerable. The coronavirus crisis is far from over, and we expect global markets to remain apt to risk aversion, despite the massive global stimulus efforts, while major economies remain in a state of lockdown. This is a negative backdrop for sterling, given the shortfall in foreign investment in troubled times to finance the UK's current account deficit. Brexit also remains a blot on the pound's landscape with Boris Johnson's government 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, however, opt for an extension in the transition period.

    [USD, CHF]
    EUR-CHF has flapped back under the 1.0600 level as risk aversion picks up again in global markets. A revisit of the five-year low that was seen on March 9th at 1.0505 looks more likely than not, assuming the coronavirus persists, as looks highly likely, which should maintain the Swiss franc's safe haven premium. 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 lifted above Friday's high in making peak at 1.4097. This comes with oil prices once gain taking a tumble. Front-month WTI prices hit a low at $19.92, which is the lowest level since March 20th, when crude prices hit a their lowest since 1999 (in nominal terms). Oil prices are down by a massive 67% on the year-to-date, and losses are sustaining, marking a significant deterioration in the Canadian economy's terms of trade. Given the glut of crude flooding the market and storage facilities, and given that demand will remain weak for a historically protracted amount of time, we anticipate a resumption in Canadian dollar weakening, with USD-CAD seen revisiting its recent 17-year high at 1.4669 before long.

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