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By XE Market Analysis March 4, 2020 7:05 am
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    XE Market Analysis: North America - Mar 04, 2020

    The dollar has found its feet after a phase of underperformance against the euro and some other major currencies. After dipping to fresh lows in the immediate wake of the Fed's 50 bp emergency rate cut yesterday, the narrow trade-weighted USD index (DXY) lifted out of a two-month low at 96.98 to levels around 97.35 in what is shaping up to be the first up-day the dollar index has seen since February 20th. The Fed's outsized rate cut was expected, although at the March-18th FOMC rather than yesterday's between-meetings move, and the dollar's price action can be classed as a sell-the-rumour, buy-the-fact dynamic. S&P 500 futures are showing a solid 2% gain after the cash version of the index closed out on Wall Street yesterday with a 2.8% loss. Market narratives have ascribed the rally in overnight U.S. equity futures to the success of former vice president Joe Biden in the Democratic Party's "Super Tuesday" primary elections, which has made him the odds-on favourite to be the Democrats nomination for president, overtaking Bernie Saunders, who is evidently deemed to be less market friendly than the moderate Biden. Elsewhere, the yen has softened and the dollar bloc currencies have firmed. Most other commodity and developing world currencies have also gained. USD-JPY, after initially dipping in early Tokyo trade, which left a five-month low at 106.84, lifted back above 107.50. EUR-JPY, AUD-JPY and other yen crosses followed suit. Stock markets in Asia sputtered and traded mixed. EUR-USD, which correlates closely with the USD index, fell back to the 1.1150 area after printing a two-month peak at 1.1213. Focus remains on the COVID-19 virus. Outside of the worst affected countries of China, South Korea, Iran, Japan and Italy, the confirmed cases so far amount to only 413, which is less than 0.5% of the total. In the UK there have been 12 thousand tests, but only 51 confirmed cases so far. Experts say this seemingly benign picture could change quickly.

    [EUR, USD]
    EUR-USD fell back to the 1.1150 area after printing a two-month peak at 1.1213 in the immediate wake of the Fed's 50 bp emergency rate cut yesterday. The dollar, after sliding for much of the last two weeks, a primary benefit of which has been the euro, looks to have found a toehold after dipping to fresh lows in the immediate wake of the Fed's 50 bp emergency rate cut yesterday. Such a move had been fully discounted in the Fed funds futures market, but at the March-18th FOMC rather than yesterday's between-meetings move. The narrow trade-weighted USD index (DXY) posted a post-Fed two-month low at 96.98 before lifting to around 97.35 in what is shaping up to be the first up-day the dollar index has seen since February 20th. We anticipate that the dollar will remain on a softening tack. The 10-year U.S. T-note yield advantage over the 10-year Bund has dropped from around 200 bp to around 160 bp in little more than two weeks. This has driven the shift higher in EUR-USD, which had in February been trading at 34-month lows. We don't expect EUR-USD gains to be a one-way street, view recent gains as a rotation higher rather than a trend following opportunity. 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. The U.S. Treasury market remains a top safe haven for global capital (being liquid, safe and positively yielding). Markets will continue to monitor the relative impact of the corona virus, and efforts to contain it, between the U.S. and Eurozone.

    [USD, JPY]
    The yen has softened. USD-JPY, after initially dipping in early Tokyo trade, which left a five-month low at 106.84, lifted back above 107.50. EUR-JPY, AUD-JPY and other yen crosses followed suit. Stock markets in Asia sputtered and traded somewhat mixed, with Australia's ASX 300 closing down by 1.7%, Japan's Nikkei 225 finishing with a fractional 0.1% gain, while China's CSI 300 is showing a 0.7% gain after staging an afternoon rally that lifted the market out of the red. BoJ Governor Kuroda said on Monday that the central bank would take necessary steps to stabilise markets. Japan's February manufacturing PMI, released on Monday, fell back to 47.8 from 48.2. Ahead, the yen will likely remain prone to bouts of safe-haven driven outperformance until markets have clarity that the peak of the COVID-19 virus spread has come and gone. There is some scientific conjecture that the virus will weaken with time, possibility aided by the improving weather in the northern hemisphere.

    [GBP, USD]
    The pound has remained heavy against the euro and yen, though has performed better versus the dollar and dollar bloc currencies. Cable has been consolidating near 1.2800 after printing a five-month low last Friday at 1.2726. On the year-to-date, at prevailing levels, the pound is showing an average loss of nearly 4% relative to the dollar, euro and yen. This follows a recent phase of underperformance, seen partly on the risk of the UK leaving the end of the post-Brexit transition period at the end of the year without a new trading deal with the EU, and partly as the currency found itself on the list of those vulnerable to a prolonged phase of risk aversion in global markets, given reliance on foreign investment to fund the UK's current account deficit (as a comparison, the pound dove 25% during the 2008-9 financial crisis). The final UK composite PMI for February was revised a notch lower to a reading of 53.0 from the preliminary figure of 53.3, declining from January's reading of 53.3. The median forecast had been for an unchanged preliminary reading, of 53.3. Driving the decline were downward revisions to both the manufacturing and services PMIs from preliminary figures. The manufacturing PMI was revised to 51.7 from 51.9, while the services PMI was revised to 53.2 from 53.3. The services PMI fell from a 53.9 reading in January, but, at 53.2, still market the second strongest reading since September 2018. The survey reported companies reporting an upturn in business activity from receding political uncertainty along with strong domestic demand. Markit highlighted that impact of the coronavirus outbreak didn't show up in the report, but is likely to in March data, with the disruptions in global supply chains and an erosion in confidence already impacting economic activity in the UK ecnonomy.

    [USD, CHF]
    EUR-CHF has ebbed back to the mid-to-upper 1.0600s with recent gains having stalled above 1.0700. A one-month peak was logged at 1.0710 on Monday, which extended a marked rebound from the near five-year low the cross posted on Friday, at 1.0585. The recent gains the cross has seen coat-tailed a rally in EUR-USD, which has been the principal beneficiary of a rotation lower in the dollar. There has also been a unwinding in risk-off positioning, which has weighed on the Swiss currency. The U.S. in January 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 to a consolidation of recent gains, settling around 1.3350. The pair had last week posted a nine-month high at 1.3464, which was the culmination of a rally from the sub-1.3000 levels that were seen in early January. The subsequent decline in the Canadian currency correlated with a precipitous fall in oil prices, which, even after recent rebound gains, are still down by around 22% on the year-to-date. 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.

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