Home > XE Currency Blog > XE Market Analysis: North America - Feb 05, 2020

AD

XE Currency Blog

Topics7018 Posts7063
By XE Market Analysis February 5, 2020 7:25 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 4942
    XE Market Analysis: North America - Feb 05, 2020

    The dollar has traded mixed while the yen has softened against most currencies amid a backdrop of rallying global stock markets. USD-JPY printed a two-week high at 109.72, extending the rebound from the four-week low seen last Friday at 108.30. The prevailing dominant view is that the coronavirus and its impact will be temporary while the stimulus efforts by China will have a positive impact. This, in turn, has seen safe haven assets and currencies, such as the Japanese currency, lose support. EUR-USD ebbed to a one-week low at 1.1014, driven by a broader decline in the euro. A revision higher in the final January services PMI for the Eurozone, to 52.5 from 52.2, had little impact on the common currency. EUR-USD remained above the two-month low at 1.0992, which was clocked last Wednesday. Sterling rallied on a strong final reading of the UK's services PMI, which lifted the headline composite PMI to a 16-month high of 53.3, up from 52.4 in the preliminary estimate and 49.3 in December. Domestic activity drove the improvement, with export demand remaining tepid, although having improved. The survey was clear in finding that improved business and consumer confidence following the election had translated into rising client demand. Delayed decision making into the December general election had led to a build of up pent up demand. Cable posted a two-day high at 1.3070, putting in some more distance from Tuesday's six-week low at 1.2941. USD-CAD was buoyant, near 1.3300, but remained below the two-month high seen on Monday at 1.3303. Oil prices found a toehold after recent heavy declines (of over 20% in little more than a month) amid expectations for OPEC to trim output quotas.

    [EUR, USD]
    EUR-USD ebbed to a one-week low at 1.1014, driven by a broader decline in the euro, which has concurrently posted two-day lows versus both the pound and Canadian dollar, and a one-week low versus the Australian dollar. A revision higher in the final January services PMI for the Eurozone, to 52.5 from 52.2, had little impact on the common currency. EUR-USD remains above the two-month low at 1.0992, which was clocked last Wednesday. Aside from the prevailing phase of euro softness, 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 3.9% versus the Aussie dollar, which is the weakest, and is showing a 0.9% 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 82% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    USD-JPY printed a two-week high at 109.72, extending the rebound from the four-week low seen last Friday at 108.30. The price action came amid a prevailing cautious bullishness in global markets, on the view that the coronavirus and its impact will be temporary while the stimulus efforts by China will have a positive impact. This, in turn, has seen safe haven assets and currencies, such as the Japanese currency, lose support. The coronavirus remains a concern that's hard to quantify, though there are narratives suspecting overreaction, as the death toll, which is now at 500 (up from 427 yesterday), 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 is 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 rallied on a strong final reading of the UK's services PMI, which drove the headline composite PMI figure to a 16-month high of 53.3, up from 52.4 in the preliminary estimate and 49.3 in December. Domestic activity drove the improvement, with export demand remaining tepid, although having improved. The survey was clear in finding that improved business and consumer confidence following the election had translated into rising client demand. Delayed decision making into the December general election had led to a build of up pent up demand. Cable has posted a two-day high at 1.3070, putting in some more distance from Tuesday's six-week low at 1.2941. The one-month peak seen last Friday is at 1.3209. The data will keep the pressure off the BoE to cut interest rates, and should help the pound trade with an underpinning. Bigger picture, we still retain a neutral-to-bearish view of the pound. UK Prime Minister Johnson on Monday, 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 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 has been buoyant, near 1.3300, but remaining below the two-month high seen on Monday at 1.3303. Oil prices have found a toehold after recent heavy declines (of over 20% in little more than a month) amid expectations for OPEC to trim output quotas in response to the demand erosion that the coronavirus and measures to contain its spread have been causing.

    Paste link in email or IM