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

    The yen has remained underpinned by safe haven demand, with coronavirus anxiety at fever pitch. USD-JPY dove more than 0.6% in printing a 24-day low at 108.51. EUR-JPY fell over 0.8% to a three-day low at 119.68. AUD-JPY, widely seen as a forex market barometer of risk appetite and a liquid currency proxy on China, dropped for a seventh consecutive day, and by the biggest amount over this period, of more than 1.5%, in making a six-month low at 70.83. The COVID-19 virus has cropped up in sub-Saharan Africa for the first time, and the WTO said yesterday that it was now at a "decisive point globally" while warning that it could "get out of control." Even though around 98% of those infected will make a full recovery, and that scientists think that the virus should weaken as time goes on, the novelty of the virus, along with its voracious ability to spread through human populations in an era of high global travel, along with social-psychological pressures to contain it, will translate as economic risk for markets. Until there are signs that the spread of the coronavirus is in retreat, risk-off positioning is likely to persist in global markets. Elsewhere among currencies, EUR-USD rallied again, this time printing a 24-day high at 1.1053. This builds on what was yesterday the biggest one-day rally the pair has experienced since January 2019. The euro has been principal beneficiary of a broad rotation lower in the dollar, which has been concurrent with U.S. Treasury yields hitting record lows, which has catalyzed a squeeze on euro short positions (the euro was last week trading at 34-month lows). USD-CAD, amid its biggest up week since December 2018, printed a nine-month high at 1.3456. The pound has remained heavy, posting a six-week low against the euro and a three-month low versus the yen. Cable ebbed to a low at 1.2859, an eight-day low.

    [EUR, USD]
    EUR-USD has rallied again, this time printing a 24-day high at 1.1053 before capping out. This builds on what was yesterday the biggest one-day rally the pair has experienced since January 2019. The euro has been principal beneficiary of a broad rotation lower in the dollar, which has been concurrent with U.S. Treasury yields hitting record lows, which has catalyzed a squeeze on euro short positions (the euro was last week trading at 34-month lows). The U.S. 10-year T-note advantage versus the 10-year Bund yield has narrowed by some 20 bp over the last two weeks, from levels around 200 bp to levels around 180 bp. Given the negative yields and apparent exposure to the coronavirus in the Eurozone (Italy ranking as the number 2 country with the most reported cases of COVID-19 outside of China), coming at a time with German growth sputtering as demand for its exports dives, we don't expect euro gains to sustain against the dollar. The U.S. Treasury market remains a top safe haven for global capital (being liquid, safe and positively yielding), and still with about a 180 bp yield advance over Bunds at the 10-year maturity level. Markets will be monitoring the relative impact of the COVID-19 virus, and efforts to contain it, between the U.S. and Eurozone.

    [USD, JPY]
    The yen has remained underpinned by safe haven demand, with coronavirus anxiety at fever pitch. USD-JPY dove more than 0.6% in printing a 24-day low at 108.51. The pair has now declined by just over 3% from the high seen last week. EUR-JPY fell over 0.8% to a three-day low at 119.68. AUD-JPY, widely seen as a forex market barometer of risk appetite and a liquid currency proxy on China, dropped for a seventh consecutive day, and by the biggest amount over this period, of more than 1.5%, in making a six-month low at 70.83. We anticipate that the yen will remain prone to bouts of safe-haven driven outperformance. The phrase "global pandemic" is being used with more frequency as the COVID-19 virus continues to spread outside of China, with the the number of new cases outside China now exceeding those being reported in China. The U.S. confirmed the first likely case of community transmission (i.e. not involving someone who had been in China) and Germany warned that it can no longer trace all cases. Until there is signs that the spread of the coronavirus is retreat, phases of risk-off positioning are likely to persist in global markets. The COVID-19 virus has also cropped up in sub-Saharan Africa for the first time, and the WTO said yesterday that it was now at a "decisive point globally" while warning that it could "get out of control." Even though around 98% of those infected will make a full recovery, and that scientists think that the virus should weaken as time goes on, the novelty of the virus, along with its voracious ability to spread through human populations in an era of high global travel, along with social-psychological pressures to contain it, will translate as economic risk for markets. Until there are signs that the spread of the coronavirus is in retreat, risk-off positioning is likely to persist in global markets.

    [GBP, USD]
    The pound has remained heavy, posting a six-week low against the euro and a three-month low versus the yen. Cable ebbed to a low at 1.2859, an eight-day low having surpassed yesterday's low by a pip. The new low is 10 pips shy of the three-month low seen last week. The UK government has signalled that it will be taking an uncompromising stance in upcoming trade talks with the EU, which commence on Monday, repeating that it is prepared to leave without a deal at the end of the Brexit-transition phase on December-21 2020. Given this stance and the limited time available, it's hard not to conclude that nothing more than a relatively narrow goods-only trade will be feasible. That means, come January 1st next year, a high proportion of UK trade (including all services) will shift to less favourable WTO terms. Bear in mind that 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. Replacing those deals with new bilateral agreements will take years. We assume that the UK's bluster is typical pre-negotiation posturing, and anticipate that a deal will be made.

    [USD, CHF]
    EUR-CHF has ebbed back under 1.0650 after the cross printed an eighteen-day high at 1.0671 yesterday on the back of strong EUR-USD gains. The high extended the moderate rebound from the five-year-low that was seen on Monday 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, amid its biggest up week since December 2018, printed a nine-month high at 1.3456. Oil prices continued to drop sharply, with front-month WTI futures down by over another 3.5% today, making a low at $45.45, which is the lowest level seen since December 2018. WTI benchmark prices are down by nearly 31% since the high seen in early January. The Canadian currency will likely remain subject to near-term volatility and overall underperformance 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.

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