Home > XE Currency Blog > XE Market Analysis: North America - Feb 25, 2020

AD

XE Currency Blog

Topics7152 Posts7197
By XE Market Analysis February 25, 2020 6:53 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5076
    XE Market Analysis: North America - Feb 25, 2020

    The yen has picked up bids as stock markets in Europe sank and S&P 500 futures pared gains. A hiatus in risk aversion was seen for much of the Asian session before waning as markets in Europe struggled to shake off concerns about the economic impact the COVID-19 virus will have in Europe. USD-JPY ebbed back towards yesterday's 110-33 low, while AUD-JPY has fallen into three-month low terrain. EUR-JPY and other yen crosses also declined. EUR-USD ebbed back to around 1.0830, correcting after printing a 12-day high at 1.0872 yesterday. The sharp rise in COVID-19 cases in Italy comes with the euro having 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 pound recouped some of the losses seen yesterday, with Cable settling around the 1.2950 mark after a 0.5% decline yesterday left a low at 1.2886. EUR-CHF lifted back above 1.0600 after yesterday clocking a new five-year-low at 1.0590. USD-CAD ebbed back below 1.3300 after yesterday posting a two-week high at 1.3307. Oil prices found a footing today after yesterday's 5%-plus tumble.

    [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 picked up bids as stock markets in Europe sink and S&P 500 futures pared gains. The hiatus in risk aversion that was seen for much of the Asian session looks to have waned with markets in Europe struggling to shake off concerns about the economic impact the COVID-19 virus will have in Europe. USD-JPY has given back more than half of the gains seen during the latter half of last week, while AUD-JPY has fallen into three-month low terrain. EUR-JPY and other yen crosses are also down sharply. There had been speculation in some market narratives last week that the yen's status as a safe haven currency was in decline, though the prevailing price action suggests otherwise. The yen may no longer be the funding currency it once was in the current world of low interest rates, and thereby not subject to bouts of sharp short-squaring driven gains during times of panicky risk aversion, but Japanese investors, who invest heavily in foreign assets in search of yield, will remain apt to rotate capital back home during times of stress. This should maintain the yen's status as a haven currency, despite clearly bearish fundamentals (in terms of growth and monetary policy expectations).

    [GBP, USD]
    The pound has recouped some of the losses seen yesterday, with Cable settling around the 1.2950 mark after a 0.5% decline yesterday left a low at 1.2886. The pair is about at the midway point of the choppy range that's been seen over the last two weeks. While January and February data have been showing a post-election rebound in economic activity in the UK, Brexit remains a concern. UK Prime Minister Johnson reaffirmed yesterday that he is prepared to walk away from the table if upcoming trade talks with the EU don't go his way. Johnson is wanting both a free trade agreement with the EU at the same time as regulatory divergence from the Union, which he sees as necessary for the UK to "restore independence," and this to be agreed in time for a January 1st 2021 implementation. Both critics of Johnson and the EU officials, including French President Macron, argue that the time frame is too short to negotiate anything other that a rudimentary goods trade deal, and that a comprehensive free trade deal will not be possible without regulatory alignment. 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 end at the end of the year without extension. Unless there is a deal with the EU on services, or among other major global economies (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 last week that the reorganisation of the economy as the UK and EU build a new relationship would weigh on activity.

    [USD, CHF]
    EUR-CHF has lifted back above 1.0600 after yesterday clocking a new five-year-low at 1.0590. 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 ebbed back below 1.3300 amid a hiatus in the risk-off positioning of yesterday, which left a two-week high at 1.3307 on a combo of U.S. outperformance and Canadian dollar underperformance, with the latter impacted by a precipitous 5%-plus decline in oil prices. Crude markets have today found a footing today, as has the Canadian currency. The Canadian currency will likely remain subject to near-term volatility as long as the coronavirus contagion remains in a state of increasing spread.

    Paste link in email or IM