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By XE Market Analysis April 22, 2020 7:38 am
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    XE Market Analysis: North America - Apr 22, 2020

    Most currencies have been holding relatively narrow ranges against a backdrop of steadying stock markets. The Australian dollar was an exception, and to a lesser extend the pound, with both managing to bounce, partially recouping losses seen during the first two days of the week. In stock markets, the MSCI Asia-Pacific equity index still edged out a two-month low, though the main indices in China and South Korea managed to recover into the black during their PM sessions. The pan-Europe STOXX 600 index rose by 1%, and S&P 500 futures by more than 1% after the cash version of the index closed on Wall Street yesterday with a 3.1% decline. As for oil prices, the June WTI contract settled in whippy price action around the $10-$12 mark, above yesterday's low at $6.55. The rout in crude prices this week has rattled investors, starkly portending where the global economy is headed in the lockdown era. In currency markets, AUD-USD rallied by about 1% in making a high at 0.6353. Australian March retail sales surged by a record 8.2% m/m, though this should be downplayed as an aberration, having been driven by panicky stockpiling due to the coronavirus outbreak. The pop in the Aussie came well ahead of the data release, with market narratives pointing to profit-taking and short-squeeze motives. Both AUD-USD and AUD-JPY have remained shy of their respective highs from yesterday. Elsewhere, EUR-USD has been plying a narrow range in the mid 1.0800s, and USD-JPY has held a narrow range in the mid-to-upper 107.00s. The Canadian dollar has managed to find a toehold after recent oil-driven declines, causing USD-CAD to dip to a 1.4125 low, though yesterday's low at 1.4111 has remained unchallenged.

    [EUR, USD]
    EUR-USD has been plying a narrow range in the mid 1.0800s so far today, holding above the five-day low that was seen yesterday at 1.0816. 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. Last month's rapid deployment of monetary stimulus measures by the Fed have impacted the dollar in recent weeks, having satiated what had been a surge in demand for the world's reserve currency. This has put a floor under EUR-USD, which has held up for a month now. In the Eurozone, meanwhile, the focus has once again turned on BTPs (Italian bonds) and the widening of Eurozone spreads (although narrower today amid abatement in risk aversion), which has prompted some to expect further action from the ECB. The central bank already has more flexibility in its bond buying schedule with the move away from monthly purchase volumes, and with a longer term horizon for its QE program, and we suspect that central bankers are to a certain extent letting spreads move out this week to increase the pressure on European governments to come up with an agreement on stimulus spending at tomorrow's teleconference of heads of states. 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]
    The Canadian dollar has managed to find a toehold after recent oil-correlating declines. USD-CAD dipped to a 1.4130 low, though yesterday's low at 1.4111 has remained unchallenged so far. As for oil prices, the June WTI contract was showing a 7% decline as of the early London session, though, at $10.75, remained above yesterday's low at $6.55. The give-away pricing reflects the fact there is increasingly no where to store crude. In time this will force significant production cuts from oil producing nations, with at least some crude importing nations likely to assist in the process by halting imports. The rout in crude prices this week has rattled investors, starkly portending where the global economy is headed in the lockdown era. We expect the Canadian dollar to remain directionally biased to the downside, though at some point oil prices are sure to stabilize and rise, which in turn should give the Loonie a prop.

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