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By XE Market Analysis February 21, 2020 7:18 am
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    XE Market Analysis: North America - Feb 21, 2020

    The yen picked up safe have demand after tumbling sharply over the previous two days. Most stock markets rotated lower in Asia, and European bourses followed suit. New COVID-19 virus cases were reported in China, South Korea and elsewhere, which kept up the pressure on regional Asian currencies, while Japan's flash PMI survey for February showed a drop in the headline composite reading to 47.0 from 50.1, the steepest contraction in seven years. Australian flash PMI data painted a similar picture. The Australian and Japanese flash PMI reports are earliest releases of PMI data each month, so are widely seen as having portent with regard to upcoming February releases in Asia. Inflation data out of Japan also affirmed a picture of ongoing benign price pressures, with the BoJ's 2% CPI target remaining a distant dream. While Asian currencies remained under pressure, out of the main currencies the biggest losers have been the Australian and New Zealand currencies, with both showing about 0.6% declines versus the strongest, the yen. Note that these currencies are underperforming on the year-to-date, with losses of over 6% against the strongest, the U.S. dollar. AUD-JPY posted a two-day low at 73.43 while AUD-USD printed a fresh 11-year low at 0.6586. NZD-USD hit a new four-month low. USD-JPY, meanwhile, corrected to 111.48 after capping out at a 10-month peak yesterday at 112.22. The dollar itself, while holding firm versus the dollar bloc and many developing world currencies, traded mostly softer versus the other main currencies. EUR-USD lifted slightly, to the 1.0800 area, after yesterday printing a 34-month low at 1.0778. Above-forecast January PMI data out of the Eurozone gave the euro a lift. The UK PMI survey also beat forecasts, helping Cable maintain rebound gains above 1.2900, above Thursday's three-month low at 1.2849.

    [EUR, USD]
    EUR-USD failed to sustain a rebound above 1.0800, which left an intraday high at 1.0820 and left yesterday's high at 1.0821 unchallenged. The rise was sparked by above-forecast February Eurozone PMI data in the preliminary release of the survey data, though the data hasn't been sufficient to shake the overall bearish tone of EUR-USD, which yesterday printed a 34-month low at 1.0778. The narrow USD trade-weighted index (DXY) yesterday posted a 37-month high at 99.91, though has since come off the boil somewhat. Bigger picture, the euro has been on underperforming list of currencies over much of the last couple of weeks amid signs (notwithstanding today's PMI figures) of a sputtering Eurozone economy, while the dollar has been underpinned by the relative robustness of the U.S. economy. The U.S. currency continues to register as the strongest main currency on the year-to-date, with gains of over 6% versus the weakest, the Australian and New Zealand dollars. Although the Fed has backed out of its tightening phase after hiking rates three times last year, yield differentials versus the other majors have mostly been holding up, while the dollar has been finding a sporadic underpinning via safe haven demand for Treasuries. EUR-USD has been trending lower since early 2018, descending from levels near 1.2500.

    [USD, JPY]
    The yen picked up safe have demand after tumbling sharply over the previous two days. Most stock markets rotated lower in Asia after Wall Street closed in the negative, and European bourses have followed suit. New COVID-19 virus cases were reported in China, South Korea and elsewhere, which kept up the pressure on regional Asian currencies, while Japan's flash PMI survey for February showed a drop in the headline composite reading to 47.0 from 50.1, the steepest contraction in seven years. Australian flash PMI data painted a similar picture. The Australian and Japanese flash PMI reports are earliest releases of PMI data each month, and are widely seen as having portent with regard to upcoming February releases in Asia. Inflation data out of Japan also affirmed a picture of ongoing benign price pressures, with the BoJ's 2% CPI target remaining a distant dream. Trying to call the point of peak contagion, and thereby the peak of economic disruption, is tough, though the consensus seems to be that it will happen in March or April, aided by the arrival of warmer weather in the northern hemisphere (although scientists aren't exactly sure if warm weather will have the same quelling effect as it does on flu and cold viruses). Japan's Q4 GDP data, released on Monday, disappointed, showing a 1.6% q/q contraction versus the median forecast for -0.9%. Q3 data were also revised down, and the figures came amid expectations for a dismal current quarter performance given the impact of measures to contain the virus outbreak in China, Japan, and elsewhere. Fundamentally, the case is clearly a bearish one for the yen, though the dynamics underpinning the currency as a safe haven (Japanese repatriations of overseas assets) should keep the Japanese currency on the list of outperforming currencies.

    [GBP, USD]
    The pound didn't see much impact from UK PMI data, despite beating expectations, with the flash composite reading for January coming in unchanged from January's 53.3, marking the joint fastest pace of private sector output since September 2018. The median forecast had been for a decline to 52.7. The survey reaffirmed the picture seen in January of releasing pent-up demand and decision making following the general election in December, which marked the end of a protracted period of political and Brexit uncertainty in the UK. The COVID-19 virus outbreak was mentioned by some survey responders, however, as having resulted in the cancellation of orders from clients in Asia, particularly in China, with manufacturers pointing to stocks of inputs falling at the quickest pace in over seven years. Sterling lifted by only about 10-12 pips against the dollar in the immediate wake of the above-forecast headline, leaving an intraday high at 1.2927 before dipping back to levels around 1.2910. Against other currencies, the pound has been mixed, showing gains versus the underperforming Australian and New Zealand dollars, and a modest advance on the euro, and a slight net decline in the case against the yen. Bigger picture, the pound has been buoyed somewhat by a post-election boost in economic activity in the UK, but the government's course for divergence from the EU in post-Brexit trade negotiations remains a concern. A Reuters poll found two thirds of economists questioned are expecting the UK to strike a goods-only trade deal with the EU, and for the Brexit transition period to not be extended. Unless there is a deal with the EU on services, or among other major global economies (which looks unlikely in the available time frame of 10 months), this view implies that the UK's overall terms of trade will drop quite sharply in January 2021.

    [USD, CHF]
    EUR-CHF printed a fresh near-five-year-low yesterday, at 1.0606. The pronounced losses the cross has been seeing of late are largely a product of safe-haven demand for the franc. The U.S. last month added Switzerland to its list of currency manipulators. The 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 lifted to the mid-to-upper 1.3200s after seeing a three-week low at 1.3212 earlier in the week. The Canadian currency will likely remain subject to near-term volatility as long as the coronavirus contagion remains in a state of increasing spread. Canada releases retail sales data today, which are seen rising 0.1% in December after the 0.9% gain in November.

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