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By XE Market Analysis February 4, 2020 7:23 am
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    XE Market Analysis: North America - Feb 04, 2020

    USD-JPY lifted to a two-day high at 109.13 amid a backdrop of rebounding global equity markets, which has seen some of the yen's safe haven premium unwind. Stimulus efforts by Beijing, coupled with widespread efforts to stem the contagion of the coronavirus have been feeding a revival in investor spirits. China's state-backed Securities Times published an op-ed calling on investors not to panic, which followed China's securities regulator yesterday limiting short selling and preventing mutual fund managers from selling shares unless for investor redemptions. The PBoC also hit the stimulus taps yesterday, and markets are expecting more. The coronavirus remains a concern that's hard to quantify, though there are narratives suspecting overreaction, as the death toll, which is now at 427, and reported cases remain a tiny fraction of those metrics for "regular" flu so far in the northern hemisphere winter. As with flu, the vast majority of people having been afflicted with the coronavirus make a full recovery, though there are worries that the virus could mutate into something worse. The travel restrictions in Asia will regardless have an economic impact across China and Asia. Hyundai will reportedly stop production lines in South Korea this week due to supply chain disruptions in China. Ratings agency Moody's still argued that while the coronavirus outbreak will weigh on discretionary consumer spending on transport, retail, tourism, and entertainment, that the Chinese government still has the financial means to absorb the shock. Among the main currencies, EUR-USD settled near 1.1050, above the 1.1035 low from yesterday. The Australian dollar rallied after the RBA refrained from cutting its cash rate. Australian cash futures had been implying about a 20% probability for a 25 bp cut heading into today's policy review. AUD-USD gained about 0.5% in making a two-day high at 0.6732.

    [EUR, USD]
    EUR-USD settled near 1.1050, above the 1.1035 low from yesterday, which was seen following a dollar rally on unexpectedly solid U.S. January manufacturing data.The pair remains above the two-month low at 1.0992, which was seen last Wednesday. Recent declines in EUR-USD have in part been 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 4.2% versus the Aussie dollar, which is the weakest, and is showing a 0.4% gain on the yen, which is 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 83% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    USD-JPY lifted to a two-day high at 109.13 amid a backdrop of rebounding global equity markets, which has seen some of the yen's safe haven premium unwind. Stimulus efforts by Beijing, coupled with widespread efforts to stem the contagion of the coronavirus, along with unexpectedly solid U.S. January manufacturing data, have collectively been feeding a revival in investor spirits. China's state-backed Securities Times published an op-ed calling on investors not to panic, which followed China's securities regulator yesterday limiting short selling and preventing mutual fund managers from selling shares unless for investor redemptions. The PBoC also hit the stimulus taps yesterday, and markets are expecting more. The coronavirus remains a concern that's hard to quantify, though there are narratives suspecting overreaction, as the death toll, which is now at 427, and reported cases remain a tiny fraction of those metrics for "regular" flu so far in the northern hemisphere winter. As with flu, the vast majority of people having been afflicted with the coronavirus make a full recovery, though there are worries that the virus could mutate into something worse. The travel restrictions in Asia will regardless have an economic impact across China and Asia. Hyundai will reportedly stop production lines in South Korea this week due to supply chain disruptions in China. Ratings agency Moody's suggested that while the coronavirus outbreak will weigh on discretionary consumer spending on transport, retail, tourism, and entertainment, that the Chinese government still has the financial means to absorb the shock.

    [GBP, USD]
    Sterling rebounded from earlier losses, with Cable returning to the 1.3020 area after pegging a low just after the open of the London interbank market at 1.2941. GBP-JPY has been a notable gainer, rising from sub-141.00 levels to over 142.00, aided along by broader underperformance in Japanese currency. There doesn't appear to have been a specific catalyst for the rebound. The January construction PMI survey revealed a solid bounce in January, but the release post-dated most of the gains in the pound. The best in six weeks levels for pound buyers, in the case against the dollar, was itself an enticement. We retain a neutral-to-bearish view of the pound. UK Prime Minister Johnson yesterday in a keynote speech made clear that his government is not looking for close regulatory alignment with the EU, which is likely to keep the UK currency's upside in check. His embrace of an "Australian-style deal" as a possibility -- a cosy way of selling the possibility of a no-deal Brexit at the end of 2020 -- suggests that he has shifted the goalposts, having formerly pledged, during the recent election campaign, that there was "zero chance" for a no deal Brexit at the end of 2020. The EU's chief Brexit negotiator, Barnier, said that the EU was not looking for regulatory "alignment" from the UK, but warned that the EU "would be very demanding" with regarding to the "quality and credibility" of the "level playing field mechanism." This is a shot across the UK bows, signalling that there will be consequences if the UK attempts go the low-regulation, low tax (a la Singapore) route. The market view is that a no-deal Brexit, and the shift to trading on WTO terms that would entail, would be economically damaging to the UK.

    [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 steadied after hitting a two-month high yesterday at 1.3303, which was seen as oil prices dove to fresh trend lows. 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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