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By XE Market Analysis February 6, 2020 7:26 am
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    XE Market Analysis: North America - Feb 06, 2020

    The yen posted fresh lows versus the dollar and Australian dollar, among some other currencies, as global stock markets continued to rally at an accelerated pace. China announced it will halve tariffs on some U.S. imports, in accordance with the phase-1 trade deal. Reports of progress in finding a vaccine against the coronavirus has been a supportive factor for stocks, too, over the last day, although any vaccine wouldn't be ready until after about a year, such is the nature of development for vaccinations. The liquidity and restrictions on share selling in China, plus the efforts across the Asia region and globally to stop contagion of the coronavirus, are also in the mix of factors stocking investor optimism, although it's clear that "peak spread" is some indeterminate way off. USD-JPY rose for a fourth consecutive day in making a 15-day peak at 109.98, further extending the rebound from the four-week low seen last Friday at 108.30. Yen crosses were steady-to-buoyant. AUD-JPY, a forex market proxy on China, for instance, posted an 10-day high. Elsewhere, the pound once again come under pressure, which sent Cable to a two-day low at 1.2952, putting the seven-week low at 1.2941 that was seen on Tuesday in the scopes. Brexit related concerns remain a bearish force on the UK currency. UK's NIESR, a think tank, said today that the government's economic plan, which is focused on fiscal stimulus to revamp the UK's infrastructure, will be stymied by the prevailing lack of spare capacity in the economy, which would risk driving up inflation and higher interest rates. EUR-USD plyied a narrow range (11 pips so far) fractionally above Wednesday's 1.0993 eight-day low, and the two-month low seen last Wednesday at 1.0992.

    [EUR, USD]
    EUR-USD has been plying a narrow range (11 pips so far) fractionally above Wednesday's 1.0993 eight-day low, and the two-month low seen last Wednesday at 1.0992. The pair remains above the two-month low at 1.0992, which was clocked last Wednesday. 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 74% odds for a 25 bp easing at the last FOMC meeting of the year in December.

    [USD, JPY]
    The yen posted fresh lows versus the dollar and Australian dollar, among some other currencies, as global stock markets continued to rally at an accelerated pace. China announced it will halve tariffs on some U.S. imports, in accordance with the phase-1 trade deal. Reports of progress in finding a vaccine against the coronavirus has been a supportive factor for stocks, too, over the last day, although any vaccine wouldn't be ready until after about a year, such is the nature of development for vaccinations. The liquidity and restrictions on share selling in China, plus the efforts across the Asia region and globally to stop contagion of the coronavirus, are also in the mix of factors stocking investor optimism, although it's clear that "peak spread" is some indeterminate way off. USD-JPY rose for a fourth consecutive day in making a 15-day peak at 109.98, further extending the rebound from the four-week low seen last Friday at 108.30. Yen crosses were steady-to-buoyant. AUD-JPY, a forex market proxy on China, for instance, posted an 10-day high. 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 has once again come under pressure, which sent Cable to a two-day low at 1.2952, putting the seven-week low at 1.2941 that was seen on Tuesday in the scopes. Brexit related concerns remain a bearish force on the UK currency. The National Institute of Economic and Social Research (NIESR), the UK's oldest think tank, said today that the government's economic plan, which is focused on fiscal stimulus to revamp the UK's infrastructure, will be stymied by the prevailing lack of spare capacity in the economy, which would risk driving up inflation and higher interest rates. The NISER said that any positive impact on the economy from higher spending would be less than 0.5% of GDP over the long run, compared with an estimated 3-4% cost of Brexit, forecasting that the government would fall well short of achieving its growth target of 2.8% per year. The Bank of England last week warned that productivity in the UK would be negatively affected by Brexit due to higher trade barriers. The BoE stated that the UK could grow only by 1.1% on average until 2023 without driving up inflation. Such forecasts, coupled with UK Prime Minister Johnson having made clear during a keynote speech this week that his government is not looking for close regulatory alignment with the EU, have been weighing on the pound, which is down 1% from week-ago levels versus the dollar, and by 2.3% on the year-to-date.

    [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, like yesterday, remained underpinned in the upper 1.3200s, but remained below the two-month high seen on Monday at 1.3303. Oil prices are up by over 4% over the last two days, which has given the Canadian dollar a prop. After a 20%-plus dive in oil prices in little more than a month, expectations for OPEC to trim output quotas have been strengthening, due to the demand erosion that the coronavirus and measures to contain its spread have been causing.

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