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By XE Market Analysis April 21, 2020 7:06 am
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    XE Market Analysis: North America - Apr 21, 2020

    Currencies have once again adopted a risk-off positioning formation as global stock and commodity markets tumble. The yen, closely followed by the dollar, have taken the lead in the outperforming pack while the commodity currencies have taken a lead in the underperforming group. Asian stock markets saw their biggest single-day sell-off in a month while the pan-Europe STOXX 600 equity index fell by nearly 2.5% as S&P 500 futures declined by over 1.5% after the cash version of the index closed out yesterday 1.8% for the worse. Yesterday's oil rout spooked investors, and while some economies are starting to reopen from lockdowns, the road back to normalcy is clearly going to be a long one. Amid this backdrop, the narrow trade-weighted USD index printed a thirteen-day high at 100.37 while EUR-USD concurrently ebbed to a four-day low at 1.0819. The yen outperformed, moderately against the dollar, but more so against the euro and even more versus the underperforming commodity currencies. USD-JPY printed a five-day low at 107.29, while EUR-JPY forayed into 19-day low territory. AUD-JPY, a forex market barometer of risk appetite in global markets, and a currency proxy of China, declined by some 0.7% in making a two-week low at 67.40. AUD-USD printed a four-day low at 0.6270. USD-CAD rallied to a 15-day high at 1.4266. While yesterday's rout in the expiring May WTI contract, and the aberration of negative pricing, has come and gone, June futures today have been highly volatile, opening above $21.0, diving to a low at $11.79 before rebounding back above $15.00. One potential support for oil prices is the fast reducing space at crude storage facilities, which is likely to force oil producers into big output cuts. President Trump, also, said that the U.S. is considering halting Saudi oil imports.

    [EUR, USD]
    EUR-USD ebbed to a four-day low at 1.0819, driven once again by a broader move in the dollar. The pair continues to trade 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]
    The yen has outperformed, only moderately against the dollar, but more so against the euro and even more versus the underperforming commodity currencies amid a backdrop of sinking global equity markets. Yesterday's oil rout spooked investors, symbolising the impact of global lockdowns. USD-JPY printed a five-day low at 107.29, while EUR-JPY forayed into 19-day low territory. AUD-JPY, a forex market barometer of risk appetite in global markets, and a currency proxy of China, declined by some 0.7% in making a two-week low at 67.40. Japanese data yesterday showed a below-forecast 11.7% y/y drop in March exports, which racked up the 16th consecutive y/y decline. Imports contracted by 5.0% y/y. The net impact was a massive shrinkage in Japan's trade surplus, which totalled just Y4.9 bln, down from 110.8 bln in February and well off the median forecast for 459.9 bln. Regardless of Japanese fundamentals, we expect the yen will remain prone to outperformance during any further phases of acute risk-off positioning, which remains a risk as expectations that loosening lockdown restrictions may be exceeding the potential for a V-shaped recovery. 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 last week highlighted that (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." We continue to anticipate USD-JPY trading at sub-100.00 levels.

    [GBP, USD]
    Cable has fallen to an 13-day low at 1.2348 on the back of both sterling underperformance and a generally firmer dollar. At the same time, the UK currency lost over 0.5% against the euro and nearly 1% to the yen. Sterling is once again correlating with global stock market direction, at least outside the case against the commodity and other currencies with high beta characteristics, which have come back under pressure over the last day. Brexit, while overshadowed by the pandemic, remains a concern. Negotiations between the UK and EU are recommencing this week via video conferencing. The UK government has continued to repeat that there will not be any extension of 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. The EU has said that it is open to extending the transition to allow more time for trade negotiations. The UK has until July 1st to formerly decide on whether to extend the transition period or not (a delay of up to two years is provisioned for in existing arrangements). The pressure is on, with little more than two months left until the UK will have to commit and with the two sides having not so far managed to narrow any of their differences on key sticking points. From the markets perspective this is negative for the pound, as it maintains the risk of the UK leaving the EU without a trade deal, and adopting much less favourable WTO terms for the bulk of its trade. As for the coronavirus situation in the UK, the country is now amid its fourth week in lockdown, which was extended last week through to May 7th. As elsewhere, and already being seen in the likes of Scandinavia, Germany and Austria, a partial reopening is on the cards in May, or at least June, pending on their being clear curve flattening in confirmed cases, along with sufficient supplies of protective clothing and availability of widespread diagnostic testing.

    [USD, CHF]
    EUR-CHF has remained heavy after last week testing 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 rallied to a 15-day high at 1.4251, partly driven by broad U.S. dollar strength and partly on Canadian dollar underperformance, which, like other commodity currencies, has come under pressure amid a prevailing bout of risk-off positioning in global markets. Yesterday's rout in the expiring May WTI contract, and the aberration of negative pricing, has come and gone, while June futures today have tumbled from levels above $20 to levels under $15.0. One potential support for oil prices is the fast reducing space at crude storage facilities, which could force oil producers to cut supply. U.S. President Trump is also reportedly considering halting Saudi oil imports.

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