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By XE Market Analysis April 1, 2020 7:13 am
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    XE Market Analysis: North America - Apr 01, 2020

    The dollar and yen have outperformed amid a backdrop of a coursing risk-off theme in global markets, which saw both the pan-Europe STOXX 600 equity index and S&P 500 futrues rack up a loss of around 3%. Asian equity markets also came under pressure. March manufacturing data in Asia and Europe showed sharp contractions as the impact of virus-containing measures starts to impact economic metrics, which comes amid the dawning reality that massive global stimulus measures simply won't be fully effective while many economies remain in a state of lockdown of as-yet unknown duration. AUD-USD tipped over 1% lower in making a five-day low at 0.6051. The Aussie still remains comfortably above the 17-year low that was seen on March 19th at 0.5507. The Kiwi dollar has also taken a tumble, as has the Canadian dollar, with oil prices sinking back toward major-trend lows as crude storage facilities burst at the seems from excessive supplies. USD-CAD gained nearly 1.5% in making a 1.4263 high, though the pair so far has remained below yesterday's peak at 1.4350. The likes of the Norwegian krona, which like the Canadian dollar is an oil-price correlator, and many developing world currencies have also come under pressure. Among the major currencies, EUR-USD posted a six-day low at 1.0918. Cable has also traded softer on the influence of dollar firmness, while USD-JPY has held near net unchanged levels around the 107.50 mark amid concurrent firmness in the yen.

    [EUR, USD]
    EUR-USD breached Monday's 1.0926 low in making 1.1018. The dollar has continued to trade generally firmer, contrasting to last week's pronounced underperformance, though the euro has concurrently been underperforming many currencies. The final March Eurozone manufacturing PMI was revised down to 45.5 in the headline reading, down from 45.8. Markit, the complier of the survey also warned that the numbers, which were higher than originally expected, are overstating actual developments, as delivery times, which usually are a sign of strong demand, boosted the index, but in this instance are far from a positive signal. The recent marked 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 troughed last Wednesday at 110.5 bp, since remaining above here, with EUR-USD concurrently coming off the boil. Bigger picture, what the relative political and economic impact that virus-containing measures will have in Europe and the U.S. are unclear, though the issue of the viability of the euro and the EU itself is once again being held in doubt by euroskeptics. The Eurozone countries so-far hardest hit by the virus in Europe -- Italy, Span and France -- have the least fiscal room for manoeuvre. On balance, we remain bearish of EUR-USD.

    [USD, JPY]
    The yen has held net steady against a generally firmer dollar so far today, but has posted gains versus most other currencies amid a backdrop of risk aversion in global markets, which richened the yen's safe haven premium. Asian stock markets fell while S&P 500 futures racked up a 3% decline. Data out of Asia today, including Japan, were nothing short of dismal, showing manufacturing contracting across most of the region, highlighting the economic toll that virus-containing measures are having. The main concern remains that the massive global stimulus measures simply won't be fully effective while many economies remain in a state of lockdown of as-yet unknown duration. While USD-JPY held near net unchanged levels around the 107.50 mark, the likes of AUD-JPY and other commodity-currency yen crosses posted losses of around 1%, while EUR-JPY lost around 0.8%. We continue to anticipate USD-JPY trading at sub-100.00 levels.

    [GBP, USD]
    The pound has come back under pressure against the dollar, euro and yen, while rising versus the underperforming commodity currencies. Cable dipped to a low at 1.2330, but has so far remained above the five-day low seen yesterday at 1.2255. Yesterday's low extended the correction from the 18-day high that was seen last Friday at 1.2486 (which was the culmination of a 9%-plus rebound from the 35-year low that was seen on March 20th at 1.1409). The pound continues to registers as an underperformer on the year-to-date, down by about 7% versus the dollar, and by 5% and 8% down against the euro and yen, respectively. We expect the UK currency will remain vulnerable so long as global markets remain apt to risk aversion, or at least unable to sustain rebounds, which might prove to be the case while there remains uncertainty about the duration major economies will remain in a state of lockdown. The UK's dependency on foreign investment to fund its current account deficit is the Achilles' heel of the pound that is exposed during persisting eras of acute risk aversion in global markets. 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 continued to gravitate around the 1.0600 level, holding above the five-year low that was seen on March 9th at 1.0505. Assuming the coronavirus crisis persists, as looks highly likely, this should maintain Swiss franc's safe haven premium, which at the least should limit upside scope of EUR-CHF. 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 has remained under pressure with oil prices sinking back toward major-trend lows as crude storage facilities burst at the seems from excessive supplies. USD-CAD has gained up nearly 1% in making a 1.4185 high, though the pair so far has remained below yesterday's peak at 1.4350. Crude prices are down by over 65% year-to-date. This level of price decline in Canada's principal export, while it sustains, marks a significant deterioration in the Canadian economy's terms of trade. Given the glut of crude flooding the market, and given that demand will remain weak for a historically protracted amount of time, we anticipate that the Canadian dollar will remain apt to underperformance. USD-CAD revisiting its recent 17-year high at 1.4669 seems likely before long.

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