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By XE Market Analysis April 23, 2020 7:39 am
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    XE Market Analysis: North America - Apr 23, 2020

    The euro has weakened against the dollar and most other currencies as the markets digested the magnitude of decline in preliminary April PMI survey data out of the Eurozone. The manufacturing sector dropped to 33.6 from 44.5 in March, while services sector collapsed to just 11.7 from 26.4 in the moth prior. PMI data out of the UK, Japan and Australia, also painted a dismal picture, predictably with the reports now fully encompassing the coronavirus/lockdown period, although crushing drops in service-sector PMI readings nevertheless raised eyebrows. Stock markets in Asia rose, while markets in Europe largely gave back opening gains. S&P 500 futures were near net unchanged as of the early European afternoon. EUR-USD printed a one-month low at 1.0756. The EU heads of state will be holding teleconference today on the question of how to finance stimulus measures. The ECB announced a further temporary easing of collateral rules, that will allow the inclusion of bonds downgraded below investment standards during the crisis, and which helped foster a narrowing in Eurozone yield spreads today. The Australian dollar rebounded out of a post-PMI data dip, posting a 0.6283 low against the U.S. buck, though the antipodean currency subsequently climbed to a three-day high of 0.6365. A surprisingly robust 29% m/m rise in preliminary March export data out of Australia, which followed weakness in January and February, helped give the Australian currency a boost, as did the the generally bullish session across Asia-Pacific equity markets today. The Kiwi dollar also lifted out of a 17-day low versus the U.S. dollar, partly with the New Zealand government pledging more fiscal stimulus, while the oil-correlating Canadian dollar also firmed. USD-CAD tested yesterday's low at 1.4113, remaining heavy after correcting from the 1.4266 high that was seen on Tuesday. June WTI crude prices lifted by over 10%, to levels above $15.0.

    [EUR, USD]
    EUR-USD has printed an 17-day low at 1.0768. The euro has been trading generally softer over the last two days, losing ground to the likes of the pound, the yen and the commodity currencies, though the magnitude of decline in preliminary April PMI survey data out of the Eurozone today has added impetus to sell. The manufacturing sector dropped to 33.6 from 44.5 in March, while services sector collapsed to just 11.7 from 26.4 in the moth prior. The EU heads of state will be holding teleconference today on the question of how to finance stimulus measures, and it seems likely that the focus will be on the financing through the EU's budget, rather than the creation of a new debt vehicle. The ECB announced a further temporary easing of collateral rules, that will allow the inclusion of bonds downgraded below investment standards during the crisis, and has today helped Eurozone yield spreads narrow and European stock markets to rally. The U.S. releases weekly jobless claims today, which we expect to show another massive rise, of 4.0 mln. New home sales data are expected to show a sharp fall to a 0.640 mln pace from 0.765 mln. Flash April manufacturing and services PMIs are due, too, and will also contribute to the dismal data picture. EUR-USD has now drifted to the south of the halfway mark of the volatile range that was seen during the height of the market panic in March. 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.

    [USD, JPY]
    USD-JPY has continued to hold a narrow range in the mid-to-upper 107.00s, lacking direction presently, while the yen has generally traded moderately softer versus most of the other main currencies amid a backdrop of advancing stock markets. Another massive U.S. coronavirus relief package and a rebound in oil prices have helped lift sentiment, reducing the yen's safe-haven premium. On Japan's domestic front, preliminary PMI survey data for April dropped sharply. The manufacturing PMI dove to a 37.8 reading in the April flash estimate, down from 44.2 in March, while the composite PMI plunged to 27.8 from 36.2. As with nearly all dismal data being released these days, the figures are hardly surprising given the global lockdowns. 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., but relevant to most countries) 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]
    The pound and UK markets were unperturbed by the dismal UK PMI data, having long since become well braced for the dismal run of data that's only now starting to show the full impact of the global lockdowns. The UK preliminary April composite PMI plummeted to a reading of just 12.9, down from 36.0 in March, driven by an eye-watering drop in services, to 12.3 from 34.5. The scale of decline in the composite reading is, of course, the biggest since records began in 1998, reflecting widespread business mothballing. On ray of light came from business optimism for the year ahead, which lifted off its record low that was seen in March, and which likely reflected expectations for a phased reopening of the economy. The data should help sharpen government about the trade-off between containing the coronavirus and economic prosperity. How to reopen economies before there is a cure or vaccine without risking a second wave of coronavirus infections is the major question, and current thinking is that it will take there being, other than social distancing, sufficient supplies of protective clothing along with availability of widespread diagnostic testing, which could take another month or two to realise. Cable is presently trading at near net unchanged levels on the day, near the 1.2450 mark. The pair is up by over 8% from the 35-year seen in March, but is down by 7% on the year-to-date. The combo of the UK's open economy, current account deficit and outsized financial sector, has meant that the pound has been vulnerable to risk aversion in global markets.

    [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 oil-correlating Canadian dollar has traded firmer over the last day. USD-CAD tested yesterday's low at 1.4113, remaining heavy after correcting from the 1.4266 high that was seen on Tuesday (when May WTI oil contracts went negative). June WTI oil prices were up 10.3% at $15.20, as of the early London session today. The expectation is that diminishing storage space for crude will force oil producers into bigger output cuts, while reopening economies from lockdown should start to see demand pick up.

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