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By XE Market Analysis January 23, 2020 6:35 am
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    XE Market Analysis: North America - Jan 23, 2020

    Sentiment remained fickle, with a 3%-plus dive in China's bellwether leading a sharply risk-off session in Asia markets, while the mood during in European markets was more measured, with the main indices, and U.S. index futures, holding near flat. This backdrop saw the yen and Swiss franc rally to fresh highs before both currencies settled. EUR-USD remained a directionally boring pair, holding today in a narrow range below 1.1100. The range on the year-to-date has been 1.1070 - 1.1124, with the low being printed yesterday. The ECB's governing board meets today, and is widely expected to a non-event for markets, with both policy and guidance seen unchanged. Sterling steadied after paring its year-to-date decline over the last couple of days following above-forecast UK data. USD-JPY dropped to a 10-day low at 109.49, extending a decline from the eight-month high that was seen last Friday at 110-28, while EUR-CHF carved out a fresh 33-month low at 1.0729, with both moves reflecting a richening in safe haven premiums. USD-CAD extended recent gains by posting a one-month high at 1.3171. Fresh losses in oil prices have been driving underperformance in the Canadian dollar, along with a more dovish tone in the BoC's policy guidance at yesterday's meeting. Front-month WTI futures lost a further 1.6%, bringing the cumulative loss over the last three days to over 6.5%. The Australian dollar remained anomalous to the normal risk-off pattern by rallying. The currency gained 0.5% against the U.S. dollar in printing a two-day high at 0.6878, rebounding from the six-week low seen yesterday at 0.6827. Better than expected Australian labour data in December was the catalyst, with the headline jobs figure rising 28.9k versus the median forecast for a 15.0k lift, while consumer inflation expectations also jumped unexpectedly, to 4.7% from 4.0%.

    [EUR, USD]
    EUR-USD has remained a directionally boring pair, holding today in a narrow range below 1.1100. The range on the year-to-date has been 1.1070 - 1.1124, with the low being printed yesterday. The ECB's governing board meets today, and is widely expected to a non-event for markets, with both policy and guidance seen unchanged. Bigger picture, the pair has been trending lower since early 2018, dropping from levels near 1.2500 and posting a 32-month low at 1.0879 in early October, the current nadir of the trend. Momentum has faded with the Fed having backed out of its tightening cycle after hiking rates three times last year. The central bank has since been engaged in capping the repo rate, which has seen its balance swell by some 11% since last September. The ECB, meanwhile, remains entrenched in a policy wait-and-see mode.

    [USD, JPY]
    The yen rallied as Asian stock markets dropped quite sharply, led by a 3%-plus plunge in China's bellwether CSI 300 index amid concerns about contagion (and mutation) of the coronavirus, with concerns remaining, despite Beijing's best efforts, that the upcoming Lunar New Year holiday period will accelerate its spread. USD-JPY dropped to a 10-day low at 109.49, extending a decline from the eight-month high that was seen last Friday at 110-28. EUR-JPY and other yen crosses saw a similar price action. We anticipate more yen outperformance on the view that the coronavirus outbreak will be hard to contain.

    [GBP, USD]
    The pound has settled after paring its year-to-date decline over the last couple of days following above-forecast November labour data and the January CBI's industrial trends survey that showed business optimism to have leapt to a reading of +23 from -44. Although headline activity remained in the CBI's report, the data provided a sign that a post-election boost in economic activity may be happening as pent-up investment and decision making are freed by the lifting of the Brexit and political fog. UK markets have consequently de-scaled expectations for the BoE to cut rates as soon as next week's policy meeting. We have been arguing that the BoE is likely to refrain from cutting rates at this juncture, and instead opt to ratchet up dovish guidance. Most policymakers on the Monetary Policy Committee will likely want more time to judge the impact of the December election result, especially with the global economy looking to be holding up, and with the government set to pursue a more expansive fiscal policy. Next UK data of note will be the flash January PMI survey, on Friday, which we expect to show a rise in the composite headline, to 50.5, from December's 49.5 reading. This matches the consensus forecast.

    [USD, CHF]
    EUR-CHF carved out a fresh 33-month low at 1.0729. Both the cross and USD-CHF have more than given back their respective rebound gains of yesterday. A richening in safe-haven premiums in global markets is underpinning the Swiss currency, long with the yen. This comes with Asian stock markets coming back under heavy pressure, led by a 3%-plus plunge in China's bellwether CSI 300 index amid concerns about contagion (and mutation) of the coronavirus, with concerns remaining, despite Beijing's best efforts, that the upcoming Lunar New Year holiday period will accelerate its spread. The franc had already rallied strongly last week following the surprising decision by the U.S. to add Switzerland to its list of currency manipulators earlier in the week. The U.S. 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 extended recent gains by posting a one-month high at 1.3171. Fresh losses in oil prices have been driving underperformance in the Canadian dollar, along with a more dovish tone in the BoC's policy guidance at yesterday's meeting. Front-month WTI futures lost a further 1.5% in Asia, bringing the cumulative loss over the last three days to 6.5%. Losses have been driven by concerns about the demand impact from the virus in Asia, along with the IEA forecasting a crude surplus in the first half of the year. As for the BoC, the central bank left policy on hold yesterday, has had been widely anticipated. It's statement said: "Data for Canada indicate that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October", noting that, "job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft."

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