Home > XE Currency Blog > XE Market Analysis: North America - Mar 06, 2020

AD

XE Currency Blog

Topics7152 Posts7197
By XE Market Analysis March 6, 2020 7:08 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5076
    XE Market Analysis: North America - Mar 06, 2020

    Another day of dollar underperformance, which has been concurrent with a precipitous tumble in U.S. Treasury yields. The COVID-19 virus, while having so far having disrupted some other economies more than the U.S. (China, Japan and South Korea, for instance), is proving to be a leveller of the hitherto relatively robust status of the U.S. economy, with several states (California, Washington and Maryland) now having declared a state of emergency. This has driven as sharp drop in U.S. Treasury yields, which have much greater downside potential than already negative-yielding sovereign bonds of major peers, which in turn has been driving dollar underperformance. The U.S. 10-year T-note yield printed a fresh record low of 0.706%, marking a drop of some 45 bps in just three days, and narrowing the dollar's yield advantage relative to its main peers. The 10-year T-note over 10-year Bund yield spread has narrowed sharply, to about 150 bp now from a spread of about 200 bp in little over three weeks. The USD index (DXY) posted a new two-month low at 95.91, extending a decline from the 35-month high that was seen on February 20th, at 99.91. EUR-USD printed an eight-month peak at 1.1332, which is the new culmination of the biggest two-week gain the pair has seen since February 2016. USD-JPY dropped by just over 1% in posting a fresh trend low at 104.99, marking the first time below 105.00 since August last year. EUR-JPY, AUD-JPY and other yen crosses are also down, though by a lesser magnitude, with USD-JPY being pressured by concurrent dollar weakness and safe-haven driven outperformance in the yen. AUD-JPY posted a four-day low, and is nearing the 11-year low the cross saw last week. AUD-USD remained relatively buoyant, holding above recent 11-year lows on the back of the U.S. dollar's weakness.

    [EUR, USD]
    EUR-USD has printed an eight-month peak at 1.1332, which is the new culmination of the biggest two-week gain the pair has seen since February 2016. Dollar weakness has been driving, correlating with the sharp decline in U.S. Treasury yields. The 10-year T-note yield looks to be on a fast track to catch up with the likes of Bunds and JGB in the negative yielding club, having today printed a fresh record low of 0.706%, dropping some 45 bps since Tuesday, and markedly narrowing the dollar's yield advantage relative to its main peers. The 10-year T-note over 10-year Bund yield spread has narrowed sharply, to about 150 bp now from a spread of about 200 bp in little over three weeks. The USD index (DXY) today posted a fresh two-month low at 95.91, extending a decline from the 35-month high that was seen on February 20th, at 99.91. The COVID-19 virus, while having so far disrupted some other economies more than the U.S. (China, Japan, South Korea and Italy), is proving to be a leveller of the hitherto relatively robust U.S. economy, with several states (California, Washington and Maryland) now having declared a state of emergency. We expect further upside in EUR-USD on the basis that Treasury yields have a greater height to fall from than do Bund yields.

    [USD, JPY]
    USD-JPY dropped by just over 1% in posting a fresh trend low at 104.99, marking the first time below 105.00 since August last year. EUR-JPY, AUD-JPY and other yen crosses are also down, though by a lesser magnitude, with USD-JPY being pressured by concurrent dollar weakness and safe-haven driven outperformance in the yen. The COVID-19 virus, while having so far disrupted some other economies more than the U.S. (China, Japan and South Korea, for instance), is proving to be a leveller of the hitherto relatively robust U.S. economy, with several states (California, Washington and Maryland) now having declared a state of emergency. This has driven as sharp drop in U.S. Treasury yields, which have much greater downside potential than already negative-yielding sovereign bonds of major peers, which in turn has been driving dollar underperformance. The Japanese currency, meanwhile, retains safe haven appeal, underpinned by the repatriation of overseas capital by nervous Japanese investors as fears mount about the global economic disruption causes by measures being taken to contain the COVID-19 virus. USD-JPY will remain headed south until markets have clarity that the peak of the COVID-19 virus spread has come and gone.

    [GBP, USD]
    The pound has found a better footing this week after incoming BoE Governor, Andrew Bailey, who will take over from Carney on March 16th, said during parliamentary testimony 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." 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 dropped back towards the five-year low that was seen last week at. 1.0585, reflecting safe haven demand for the Swiss currency as concerns rise about the global economic disruptions being caused by efforts to contain the COVID-19 virus. 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 remained buoyant following the BoC's 50 bp rate cut this week, along with oil prices coming back under pressure despite the OPEC decision to trim crude supply. The pair looks set for a retest of the nine-month high seen last week at 1.3464, which was the culmination of a rally from the sub-1.3000 levels that were 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.

    Paste link in email or IM