Home > XE Currency Blog > XE Market Analysis: North America - Feb 26, 2020

AD

XE Currency Blog

Topics7208 Posts7253
By XE Market Analysis February 26, 2020 7:25 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5132
    XE Market Analysis: North America - Feb 26, 2020

    The dollar bloc and most developing world currencies remained under pressure amid an ongoing fragile sentiment in global markets. The Australian dollar tumbled to fresh major-trend lows versus the U.S. dollar following a big miss in Q4 construction data out of Australia, which contracted 3.0% q/q versus the median forecast for -1.0%. The data suggests Q4 GDP may be weaker than expected, and that's before the Q1 impact of the worst-in-decades wildfires, and the sharp drop in Chinese tourist visits over the Lunar New Year period along with other economic disruptions caused by the coronavirus outbreak. AUD-USD hit a new 11-year low at 0.6565. The New Zealand dollar fell to a fresh four-month low while the Canadian dollar probed two-week lows against the U.S. buck. USD-JPY, meanwhile, recouped to levels around 110.50 from yesterday's eight-day low at 109.89. Yen crosses mostly followed suit, though AUD-JPY printed a four-and-a-half-month low at 72.37. EUR-USD printed a fresh two-week high at 1.0897 in what is now the fourth consecutive day of higher highs, which is the most sustained upside run of the year so far. The reason appears to be the drop in the 10-year T-note yield to record lows and the concurrent erosion in the dollar's yield advantage over the euro. The 10-year yield differential between the Treasury versus the Bund 10-year has narrowed by nearly 13 bp since last Friday, to 185.0 bp, which is the narrowest since January 2017. The pound has turned lower today, reversing or more than reversing gains seen following yesterday outperformance against the dollar, euro and other currencies. The UK currency hit a two-week low in the case against the euro, while Cable posted a low at 1.2923, which is 9 pips short of yesterday's low.

    [EUR, USD]
    EUR-USD printed a fresh two-week high at 1.0897 in what is now the fourth consecutive day of higher highs, which is the most sustained upside run of the year so far. The reason appears to be the drop in the 10-year T-note yield to record lows and the concurrent erosion in the dollar's yield advantage over the euro. The 10-year yield differential between the Treasury versus the Bund 10-year has narrowed by nearly 13 bp since last Friday, to 185.0 bp, which is the narrowest since January 2017. Coupled with this is the view that the U.S. economy's relative robustness may be challenged by the impact of the coronavirus, which has, for now, dented the appeal of the dollar as a safe haven currency, at least relative to the euro and some other major currencies as the greenback has still been rising against the pound, the dollar bloc and most developing world currencies. We don't anticipate too much upside potential for EUR-USD from here given the headwinds being faced by Europe. A drop in export demand has hit the Germany economy, while Italy ranks as having the second highest number of COVID-19 cases outside China. International demand for Treasuries, with their deep liquidity and still relatively high yields, is also likely to remain high should risk aversion in markets persist, which should in turn underpin the dollar. Recent data showed a record level of Treasury purchases by Japanese investors. We still anticipate a revisit of EUR-USD's 34-month low at 1.0778, which was seen last Thursday.

    [USD, JPY]
    USD-JPY has recouped to levels around 110.50 from yesterday's eight-day low at 109.89. Yen crosses have mostly followed suit, though AUD-JPY printed a four-and-a-half-month low at 72.37. While Asian stock markets marched lower, downside momentum abated in European markets while S&P 500 futures posted a modest rebound. Recent price action has re-affirmed the yen's status as a safe haven currency. Fundamentally, the case may 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. It's clear that the COVID-19 virus hasn't reached peak contagion rate, and the media hype and (arguably) panicky responses by governments -- with the consequence of economically disruptive containment measures -- seems more likely to grow than to wane at this point. Further bouts of pronounced risk-off positioning therefore seem in store. Ultimately, the proclivity for viruses to weaken as they pass through populations, coupled with the remedying influence of upcoming spring weather in the northern hemisphere, along with efforts to contain the spread, should bring an end to COVID-19.

    [GBP, USD]
    The pound has turned lower today, reversing or more than reversing gains seen following yesterday outperformance against the dollar, euro and other currencies. The UK currency hit a two-week low in the case against the euro, while Cable posted a low at 1.2923, which is 9 pips short of yesterday's low. The EU's publishing of its trade negotiation mandate with the EU, which stipulates that EU standards (in areas such as social and employment, environment, tax and regulations etc) should only be "a reference point" in negotiations with the UK to form a post-Brexit trade agreement, had boosted sterling yesterday -- with the lack of an explicit demand for dynamic alignment being the key takeaway, suggesting there may sufficient flexibility for the UK and EU to reach an agreement. Formal trade negotiations between the UK and EU will commence next Monday (March 2nd). The pound will almost certaintly continue to be buffeted by news from the trade negotiation front. A deal between the UK and EU is possible by the end of the year despite the short time frame, given they are starting from perfect equivalence, though anything short of a comprehensive free trade deal (which looks unlikely to be achieved) would be a negative for the pound. When the UK leaves the Brexit transition period at the end of 2020, it will not just be leaving the EU's single market and customs union, but also participation in the 40 free trade deals the EU has around the world. For now, we retain an overall neutral view of sterling, with downside risk seen as the year progresses.

    [USD, CHF]
    EUR-CHF has remained heavy after clocking a new five-year-low at 1.0590 on Monday. 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 settled in the upper 1.3200s after posting a two-week high on Monday 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 since remained heavy, though above recent lows. The Canadian currency will likely remain subject to near-term volatility as long as the coronavirus contagion remains in a state of increasing spread. The risk is for further gains in USD-CAD as the spread of the COVID-19 virus doesn't look to have reached a peak, in turn suggesting more economic disruption and less demand for oil.

    Paste link in email or IM