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By XE Market Analysis February 24, 2020 6:52 am
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    XE Market Analysis: North America - Feb 24, 2020

    The dollar, yen and Swiss franc have outperformed amid a backdrop of tumbling stock markets, with risk aversion picking up on news of a continued rise in coronavirus infections outside China, particularly in South Korea, the Mideast and in Italy. Many countries in the Mideast have imposed travel restrictions, while the rise in infections in Italy raised the spectre of the virus gaining a foothold in Europe. Italy now has the second highest confirmed cases of COVID-19 infections outside China, second to South Korea and overtaking Hong Kong and Singapore. For those looking at the bigger picture, and cause of optimism, there remains scientific conjecture that the virus will naturally weaken a it spreads (a lowering in the "zoonotic force of inflection" or weakening in the rate of transmissibility, as is typical in virus outbreaks), as highlighted by a report in the Lancet Journal, with April seen as likely to mark the point of peak contagion. Also, the data shows that the death rate remains at about 2%, similar to flu and cold viruses, with most infected people making a full recovery. However, there is, rightly or wrongly, an air of panic, and the economic impact of measures being taken are starting to show in data. The narrow trade-weighted USD index recouped about half of Friday's losses in rising to 99.63. The dollar remains the strongest currency on the year-to-date, relative to the other main currencies, showing net gains over over 6% against the weakest, the Australian and New Zealand dollars. The relative robustness of the U.S. economy, coupled with the safe haven appeal of U.S. Treasuries, have been underpinning the greenback. AUD-USD printed a fresh 11-year low at 0.6585. USD-JPY ebbed back to the lower 111.00s, down from the 10-month high seen last week at 112.22. Developing-world currencies came under notable pressure.

    [EUR, USD]
    EUR-USD remains heavy after managing to post what is only its second up week of the year last week. Losses today have breached last week's closing level, and the 1.8005 intraday low marks about a two-thirds retracement from the high seen on Friday. The 34-month low at 1.0778, seen last Thursday, looks vulnerable following news of a sharp rise in COVID-19 cases in Italy. While the euro has been on underperforming list of currencies over much of the last several weeks amid data showing a sputtering Eurozone economy (notwithstanding improvement in February PMI data), 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, dropping from levels near 1.2500.

    [USD, JPY]
    The yen has today returned to its safe-haven driven outperforming ways amid a backdrop of tumbling stock markets in Asia, with risk aversion picking up on news of a continued rise in coronavirus infections outside China, particularly in South Korea, the Mideast and in Italy. Many countries in the Mideast have imposed travel restrictions, while the rise in infections in Italy raised the spectre of the virus gaining a foothold in Europe. Italy now has the second highest confirmed cases of COVID-19 infections outside China, second to South Korea, and overtaking Hong Kong and Singapore. For those looking at the bigger picture, and cause of optimism, there remains scientific conjecture that the virus will naturally weaken a it spreads (a lowering in the "zoonotic force of inflection" or weakening in the rate of transmissibility, as is typical in virus outbreaks), as highlighted by a report in the Lancet Journal, with April seen as likely to mark the point of peak contagion. Also, the data shows that the death rate remains at about 2%, similar to flu and cold viruses, with most infected people making a full recovery. However, there is, rightly or wrongly, an air of panic, and the economic impact of measures being taken to stem the virus spread are starting to show in data. USD-JPY ebbed back to levels around 111.50, down from the 10-month high seen last week at 112.22. 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 while risk aversion prevails in global markets.

    [GBP, USD]
    The pound has come under pressure, led by a 0.7% drop versus the yen and a 0.6% fall against the dollar. The UK currency was showing a 0.3% loss versus the euro (as of the late London morning session), and was near net unchanged against the underperforming Canadian and New Zealand dollars, and moderately lower with regard to the Australian dollar. Cable has unwound most of Friday's gain in posting a low at 1.2887. Sterling has been sustain gains lately despite data affirming a post-election boost in economic activity in the UK. The government's course for divergence from the EU in post-Brexit trade negotiations remains a concern. A Reuters poll last week 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), the risk is that the UK's overall terms of trade will drop quite sharply in January 2021. BoE's Carney said that the reorganisation of the economy as the UK and EU build a new relationship would weigh on activity. The COVID-19 virus outbreak was also mentioned by some respondents in the February PMI surveys 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.

    [USD, CHF]
    EUR-CHF has re-tested its near-five-year-low 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 is amid its biggest single up-day in a month, rallying over 0.5% to a two-week high at 1.3307. The gain partly reflects outperformance in the U.S. dollar and partly underperformance in the Canadian currency, which has been concomitant with a 4%-odd dive in oil prices. News that the COVID-19 virus is spreading at a quickened rate outside of China raised fears for an erosion in global demand for oil, which in turn has impacted the Canadian dollar. The Canadian currency will likely remain subject to near-term volatility as long as the coronavirus contagion remains in a state of increasing spread.

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