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By XE Market Analysis February 3, 2020 6:51 am
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    XE Market Analysis: North America - Feb 03, 2020

    The yen steadied today after a phase of outperformance amid the backdrop of risk aversion in global markets. Chinese markets reopened from their one-week-plus hiatus and stock markets there duly dove in catch-up trading. The CSI 300 finished with a 7.9% loss, while the MSCI Asia-Pacific index declined by 0.9% in what is now an eighth consecutive day of losses and reaching two-month lows. In contrast, European stocks turned higher, as did U.S. index futures. The coronavirus increased is reported cases and geographical spread over the weekend, and economists have been continuing to downwardly adjust their China and Asia region growth expectations. Data, predating the coronavirus outbreak, showed China’s industrial firms saw the first annual decline in profits in four years in 2019 amid the slowest economic growth in nearly 30 years. The PBoC trimmed reverse repo rates by 10 bps while injecting 1.2 trillion yuan of liquidity into the markets, which saw the yuan come under pressure. USD-JPY lifted moderately, making an intraday high at 108.70 before settling back near the 108.50 mark. The pair has been in a pronounced downtrend for two weeks now, from levels above 110.00, and posted a 26-day low on Friday at 108.30. AUD-JPY, which is widely seen as a broad forex market barometer of risk appetite in global markets, and more narrowly as a liquid currency proxy of China, printed a new three-and-a-half-month low at the opening of trading today, at 71.81, before lifting. We advise trend following in the anticipation that the worst has yet to be seen with regard to the coronavirus. Elsewhere, the pound dropped by over 1% against the dollar, more than unwinding last week's gains seen after the BoE refrained from easing rates. The losses came despite an unexpected up-revision in final January UK manufacturing PMI data, though the report also showed businesses remain concerned about Brexit with the government sending out mixed signals about whether it wants a close alignment with the EU or divergence. Cable printed a low at 1.3052. EUR-USD, meanwhile, ebbed moderately, to a 1.1059 low. USD-CAD edged out a fresh seven-week high at 1.3255, surpassing Friday's peak by 2 pips.

    [EUR, USD]
    EUR-USD is moderately lower, near the intraday low seen earlier at 1.1059, down from the 11-day high seen on Friday at 1.1095. The pair remains above the two-month low at 1.0992 on Wednesday. Recent declines in EUR-USD were a reflection of the dollar having been outperforming the common currency in the context of rising risk aversion in global markets. The U.S. currency is registering as the strongest of the main currencies on the year-to-date, reflecting international demand for Treasuries (the dollar is up by 4.7% versus the Aussie dollar, which is the weakest, and is showing a 0.2% gain on the yen, which is the marginally the second strongest). Bigger picture, EUR-USD has been trending lower since early 2018, dropping from levels near 1.2500 and posting a 32-month low at 1.0879 in early October, the current nadir of the trend. Momentum has faded, however, with the Fed having backed out of its tightening phase after hiking rates three times last year. The central bank has since been engaged in capping the repo rate, and Fed funds futures are discounting about 88% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    The yen steadied today after a phase of outperformance amid the backdrop of risk aversion in global markets. Chinese markets reopened from their one-week-plus hiatus and stock markets there duly dove in catch-up trading. The CSI 300 finished with a 7.9% loss, while the MSCI Asia-Pacific index declined by 0.9% in what is now an eighth consecutive day of losses and reaching two-month lows. U.S. and European index futures, in contrast, posted gains. The coronavirus increased is cases and geographical spread over the weekend, and economists have been downwardly adjusting their China and Asia region growth expectations. Data, predating the coronavirus outbreak, showed China’s industrial firms saw the first annual decline in profits in four years in 2019 amid the slowest economic growth in nearly 30 years. The PBoC trimmed reverse repo rates by 10 bps while injecting 1.2 trillion yuan of liquidity into the markets, which saw the yuan come under pressure. USD-JPY lifted moderately, making an intraday high at 108.70 before settling back near the 108.50 mark. The pair has been in a pronounced downtrend for two weeks now, from levels above 110.00, and posted a 26-day low on Friday at 108.30. AUD-JPY, which is widely seen as a broad forex market barometer of risk appetite in global markets, and more narrowly as a liquid currency proxy of China, printed a new three-and-a-half-month low at the opening of trading today, at 71.81, before lifting. We advise trend following in the anticipation that the worst has yet to be seen with regard to the coronavirus.

    [GBP, USD]
    Sterling came under notable pressure, dropping by over 1% against the dollar. The losses sustained despite UK manufacturing PMI data for January showing an unexpected revision higher, to 50.0 from 49.8, although the survey also highlighting ongoing concerns among respondents in the sector about Brexit. The UK currency has now more than given back the gains seen following the BoE's decision, last Thursday, to refrain from cutting interest rates. Cable has printed a low at 1.3051 in what is already the biggest intraday decline since December 17. The post-BoE high, seen on Friday, was 1.3209, which is a one-month peak. Prime Minister Johnson will be visiting President Trump this week, heralding the start of post-Brexit trade negotiations between the two nations. Negotiations with the protectionist president will likely be tough. The outgoing British ambassador to the U.S., Kim Darroch, in an interview with the Guardian last week, said he doubted that the UK has the resources for parallel negotiations with the U.S. and EU. He also said that Trump will be pitching for greater access for U.S. agricultural products and U.S. pharmaceutical products, which would be politically controversial in the UK. These remarks chime with bearish narratives about the pound, which are also focusing on the UK government's self-imposed 11-month time frame for trade negotiations until leaving the transition phase (and thereby access to the EU's single market and customs union), which many very as being a much too short period to form a comprehensive trade deal.

    [USD, CHF]
    The Swiss franc has been rallying strongly recently, hitting 3-month highs against the euro. The gains have been partly a product of safe-haven demand, and partly as a lasting consequence of the surprising decision by the U.S. to add Switzerland to its list of currency manipulators last month. The U.S. 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 has traded buoyantly but narrowly so far today, just off the seven-week high seen on Friday at 1.3253. The impact of the spreading coronavirus, and expectations on Asian and global growth, and demand erosion for oil, has been weighing on the Canadian currency, given the exposure of the Canadian economy to oil prices. The WTI oil benchmark has dropped by over 20% over the last month. We advise trend following USD-CAD in the anticipation that the worst has yet to be seen with regard to the coronavirus.

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