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By XE Market Analysis February 7, 2020 6:28 am
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    XE Market Analysis: North America - Feb 07, 2020

    The yen rallied amid rekindling safe haven demand amid the unrelenting rise and spread in coronavirus cases, which has hampering economic activity across China and Asia as a consequence of the measures being taken to tamp down the pandemic. S&P 500 futures dropped by 0.5%, correcting after the cash version of the index hit a record high on Wall Street yesterday, while Europe's STOXX 600 equity index was showing a similar magnitude of loss (as of the late London morning). USD-JPY posted a two-day low at 109.67. Yen crosses also fell, led by AUD-JPY, which is widely viewed as a liquid currency market proxy on China. The cross dove by 1%, reversing about half of the recent gain. AUD-USD came within two pips of the 11-year low that was seen last October, at 0.6670. Focus will turn to the release of the U.S. January payrolls report, which comes with upside risk, though even good data may start to look like a disconnect from the prevailing realities. EUR-USD has posted to a fresh four-month low at 1.0947. A number of euro crosses have also turned lower, most notably EUR-JPY, which has racked up a 0.5% loss. Misses in German and French December production data has weighted on the common currency, while the dollar has remained firm following the round of solid U.S. data releases on Thursday. The narrow trade-weighted USD index (DXY) hit a new four-month high at 98.61 in what is the biggest weekly dollar gain the index has registered since August last year. Positioning in Fed fund futures presently imply a 10% chance for the Fed cutting interest rates by 25 bp at its March FOMC meeting, down from the 27% probability being factored a week ago. USD-CAD printed a one-month high at 1.3313. Cable matched yesterday's six-week low at 1.2921, though has so far failed to breach it.

    [EUR, USD]
    EUR-USD has posted to a fresh four-month low at 1.0950. A number of euro crosses have also turned lower, most notably EUR-JPY, which has racked up a 0.5% loss. Misses in German and French December production data has weighted on the common currency, while the dollar has remained firm following the round of solid U.S. data releases on Thursday, including upbeat consumer confidence and a stabilization in manufacturing after passage of the trade deals. The narrow trade-weighted USD index (DXY) hit a new four-month high at 98.61 in what is the biggest weekly dollar gain the index has registered since August last year. Positioning in Fed fund futures presently imply a 10% chance for the Fed cutting interest rates by 25 bp at its March FOMC meeting, down from the 27% probability being factored a week ago. Markets are now anticipating the release of the January U.S. payrolls report. We're expecting a 150k rise in nonfarm payrolls, versus 140k in December. But recent data suggest upside risks. Hourly earnings are seen rising 0.3% after the tepid 0.1% gain previously, with the average workweek steady at 34.3 hours. The unemployment rate should remain unchanged at 3.5%. There also will be attention on the Fed which releases its Monetary Policy Report at 11 ET (16:00 GMT) ahead of next week's testimony from Chair Powell.

    [USD, JPY]
    The yen has rallied amid rekindling safe haven demand amid the unrelenting rise and spread in coronavirus cases, which has hampering economic activity across China and Asia as a consequence of the measures being taken to tamp down the pandemic. S&P 500 futures are down by 0.5%, correcting after the cash version of the index hit a record high on Wall Street yesterday, while Europe's STOXX 600 equity index is down by 0.4%. USD-JPY has posted a two-day low at 109.67. Yen crosses are also down, led by AUD-JPY, which is widely viewed as a liquid currency market proxy on China. The cross is presently showing a decline of 1%, reversing about half of the recent gain. Focus will soon turn to the release of the U.S. January payrolls report, though how even good data may now start to look like a disconnect with the prevailing realities.

    [GBP, USD]
    Cable matched yesterday's six-week low at 1.2921, though has so far failed to breach it (as of the late London morning). The pound is trading mixed generally, also losing ground to the yen, while gaining on the euro, amongst other currencies. Brexit related concerns are likely to remain a bearish headwind on the UK currency, while the National Institute of Economic and Social Research (NIESR), the UK's oldest think tank, said yesterday 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 forcing 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 by over 1% from week-ago levels versus the dollar, and by nearly 2.4% 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 printed a one-month high at 1.3309. Both yield differentials and oil prices have been supporting the pairing, the former working in the U.S. dollar's favour following a solid round of U.S. data releases on Thursday, and weakness in the latter serving to undermine the Canadian currency.

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