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By XE Market Analysis April 17, 2020 7:31 am
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    XE Market Analysis: North America - Apr 17, 2020

    The dollar more than reversed out of intraday declines during the London AM session. The narrow trade-weighted USD index lifted out of a 99.85 and tested yesterday's eight-day high at 100.29, while EUR-USD dropped back to a 10-day low at 1.0813. The dollar also advanced against the pound, and the commodity currencies, breaking its inverse correlation with global stock market direction, which have rallied after U.S. President Trump said that U.S. states can reopen in a three-staged process. S&P 500 futures were showing a 3% gain heading into the New York open. The risk-on sentiment hasn't been covering the full spectrum of asset classes and currencies. Oil prices have plunged to fresh decade lows (WTI futures hitting an 18-year low at $18.03), and the likes of the Australian and Canadian dollars have more than reversed intraday gains that were being seen in the Asian session. U.S. Treasury yields have also come down, with the 10-year T-note yield dipping below 0.640%, down from the 0.691% high that was seen earlier in the day. USD-CAD hsa rebounded out of a two-day low at 1.4003, with the pair reaching levels around 1.4100 before capping out. USD-JPY ebbed modestly lower, down from Thursday's four-day high at 108.08, while the yen outperformed other currencies, albeit moderately so. In the news mix today, was China's Q1 GDP data plunging 6.8% y/y, the first contraction on record although hardly surprising given the draconian virus-containing measures taken in the country for much of the first quarter.

    [EUR, USD]
    EUR-USD has dropped back amid a general bout of dollar gains, which has pushed the pair to a 10-day low at 1.0813. The dollar looks to have broken its inverse correlation with global stock market direction, which have rallied after U.S. President Trump said that U.S. states can reopen in a three-staged process. S&P 500 futures are showing a near 3% gain presently. The risk-on sentiment isn't covering the full spectrum of asset classes and currencies. Oil prices have plunged to fresh decade lows, and the likes of the Australian and Canadian dollars have more than reversed intraday gains that were being seen in the Asian session. U.S. Treasury yields have also come down, with the 10-year T-note yield presently at 0.637%, down from the 0.691% high that was seen earlier in the day. EUR-USD at prevailing levels is a little to the south of the halfway mark of the volatile range that was seen during the height of the market panic in March. The rapid deployment of monetary stimulus measures by the Fed, and expectations for more, have impacted the dollar in recent weeks, having satiated what had been a surge in demand for the world's reserve currency . We expect EUR-USD, after whipping between a 1.0637 low and a 1.1494 high in March, to remain in a choppy trading pattern, lacking clear directional bias for now.

    [USD, JPY]
    USD-JPY ebbed modestly lower, to levels below 107.70, down from Thursday's four-day high at 108.08. The yen has traded mixed in narrow ranges against other currencies, ebbing versus the commodity currencies while gaining modest ground versus the euro and some other currencies. The Japanese currency has been little impacted by a rotation high in global stock markets, sparked by U.S. President Trump saying that U.S. states can reopen in a three-staged process, joining a number of other countries that are already amid the first, cautious phase of unlocking their economies. This helped markets overlook China's GDP plunge of 6.8% y/y, the first contraction on record but hardly surprising given the draconian virus-containing measures taken in the country for much of the first quarter. There has been lots of talk about a V-shaped recovery, though the reality is that the return to economic normalcy is likely to be a long road. A study from the Harvard School of Public Health this week highlighted that the return to normal may be a long road, saying (of the U.S.) that "intermittent distancing may be required into 2020 unless critical care capacity is increased substantially or a treatment of vaccine becomes available." Such a backdrop would keep the yen broadly underpinned. We continue to anticipate USD-JPY trading at sub-100.00 levels.

    [GBP, USD]
    Cable has settled above yesterday's eight-day low at 1.2408. A rebound capped out a 1.2522, with the pair having subsequently drifted back to the lower 1.2400s. Sterling is concurrently showing modest losses against the euro and yen, despite gains in global stock markets, to which the UK currency has for the most part been correlating positively during the prevailing pandemic era. The risk of a hard no-deal Brexit has re-emerged as a concern for the pound after a spokesman for the UK prime minister said yesterday that, 1, the pandemic has strengthened the need or the UK to be free of EU regulation after 2020, and 2, that there will not be any extension to the post-Brexit transition, which expires at the end of the year (and which maintains UK membership of the EU's customs union and single market, but without voting rights), even if requested by the EU. This comes with negotiations, which have been hobbled by the coronavirus crisis, set to resume next week. The UK has only until July 1st to decide on whether to extend the transition period or not, and the two sides have not so far managed to narrow any of their differences on key sticking points. The UK government is continuing to play hardball despite the disrupting impact of the pandemic. The risk is that the EU will call its bluff, as the economic consequences would be harder felt in the UK than in the EU. Tipping out of the transition period without a deal would result in the UK economy trading on less favourable WTO terms. The Centre for Economic Performance estimates that such a shift would reduce UK trade with the EU by 40% over 10 years, while also causing slowing in investment and productivity growth.

    [USD, CHF]
    EUR-CHF yesterday tested the five-year low that was first 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 should keep EUR-CHF directionally biased to the downside. 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 hsa rebounded out of a two-day low at 1.4003, with the pair reaching levels around 1.4100. The Canadian dollar had seen modest outperformance after U.S. President Trump said that U.S. states can reopen in a phased process. This sparked a rally on global stock markets. But, oil markets haven't felt the good vibes, with sentiment remaining preoccupied by the massive demand/supply imbalance. Front-month WTI futures have racked up losses of over 8% in posting a new 18-year low at $18.03. This is telling of the fact that the return to economic normalcy is likely to be a long road. We retain a bullish view of USD-CAD.

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