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By XE Market Analysis March 5, 2020 7:37 am
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    XE Market Analysis: North America - Mar 05, 2020

    The dollar has come back under pressure versus its major counterparts as the 10-year Treasury yield dropped sharply back under 1.0%. The U.S. currency posted a five-month low against the yen and tracking back to recent trend lows versus the euro, though fared better against the dollar bloc and developing-world currencies. Positioning in the Fed funds market fully factored in a follow-up Fed 25 bp easing at the approaching March-18th FOMC meeting, and a chance for another outsized 50 bp move. The narrow trade-weighted USD index (DXY) fell over 30 pips in making a 97.02 low. The index looks set for a re-visit of the two-month low at 96.98 seen in the immediate wake of the Fed's move on Monday. EUR-USD rose back above 1.1150, though has remained below Monday's two-month peak at 1.1213. USD-JPY dove to five-month lows under 107.00, posting a low so far of 106.79. Risk aversion once again took a grip, with stocks turning sharply lower in Europe after what had been a positive session in Asia, and S&P 500 futures have racked up a 2% loss in overnight trading. This comes with the UK's chief medial officer saying that UK has gone from trying to contain the COVID-19 virus to trying to delay the spread of it. Switzerland also reported its first death from the virus, while Japan suspended visas for visitors from China and South Korea. The Air Transport Authority also revised its estimate of the cost to global airlines in terms of lost revenue this year, to $113 bln, over three times the amount it estimated just two weeks ago. That comes amid news that UK airline Flybe has collapsed. These developments come after California declared a state of emergency. The spectre of further economic-disrupting measures to combat the virus has returned investors to a state of risk aversion.

    [EUR, USD]
    EUR-USD lifted back above 1.1150 on another bout of dollar weakness. The pair has so far remained below Monday's two-month peak at 1.1213. The dollar's on-the-fact rebound following the Fed's 50 bp rate cut on Monday, which had been discounted, albeit coming sooner than expected, looks to have run out of steam with positioning in the Fed funds market fully factoring in a follow-up 25 bp easing, and risk for another 50 bp move, at the approaching March-18th FOMC meeting, which would wipe out the three quarter-point hikes of 2019. The narrow trade-weighted USD index (DXY) has dropped back about 30 pips today to levels around 97.05, fading from yesterday's rebound high at 97.59. The index looks set for a re-visit of the two-month low at 96.98 seen in the immediate wake of the Fed's move on Monday. The 10-year U.S. T-note yield advantage over the 10-year Bund has dropped from around 200 bp to around 162-3 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.

    [USD, JPY]
    USD-JPY has dropped to five-month lows under 107.00. posting a low so far of 106.79. A combo of dollar weakness and yen safe-haven driven outperformance has carried the pair lower, with the Japanese currency's dynamic being influenced by a sharp drop in European stock markets and other risk assets on fresh concerns about the economic impact the COVID-19 virus. As for the dollar, markets are fully pricing in a 25 bp rate cut at the Fed's upcoming FOMC meeting, on March 16th, and a chance for a 50 bp move.

    [GBP, USD]
    The pound has staged a rebound from lows over the last three days, with Cable today extending to a six-day high at 1.2915 and EUR-GBP edging out a three-day low. This comes amid a re-pricing in BoE rate cut expectations, with positioning in the sterling OIS market implying about a 50/50 chance for the central bank to deliver a 25 bp rate cut at its March 26th Monetary Policy Committee meeting. This time yesterday, the market had been discounting a 65% probability for such a move. Incoming BoE Governor, Andrew Bailey, who will take over from Carney on March 16th, said during parliamentary testimony yesterday that, with regard to the coronavirus, "what we need is frankly more evidence than we have at the moment as to exactly how this is feeding through." The UK currently has only 85 confirmed cases of COVID-19. Bailey was careful not to rule out any policy response, even an in-between meeting emergency move, but clearly his message was measured. He also said that, "we are going to have to provide some form of supply chain finance in the not very distant future to assure that the effects of this shock from the virus are not damaging ... particularly to small and medium sized firms." Regarding Brexit, Bailey said, "my strong view is we should do all we can to get a free trade agreement with the EU and not fall back on the WTO." On the year-to-date, the pound is still showing a an average loss of about 3% to the dollar, euro and yen, despite the prevailing rebound. The UK this week commenced trade negotiations with both the EU and U.S., but markets are pricing-in a 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 shifting to less favourable WTO trading terms.

    [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 remained buoyant following the BoC's 50 bp rate cut yesterday, but remained off recent highs. 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. Oil prices are firmer today, though off recent highs, into a meeting of OPEC members today, who are expected to vote for a cut in supply quotas. 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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