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By XE Market Analysis March 19, 2020 7:27 am
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    XE Market Analysis: North America - Mar 19, 2020

    The dollar remained firm amid a continuing backdrop of highly skittish global markets, while traditional safe havens, including U.S. Treasuries and many other sovereign bonds, and gold, have remained under pressure. Australian 10-year bonds has undergone its biggest three-day drop since 1987. Liquid, safe cash, and preferably in U.S. dollars, is what investors want right now amid a stampede to cover fund redemptions. The narrow trade-weighted USD index (DXY) has posted a new three-year high, at 101.87. Commodity currencies remained under pressure, with the Canadian dollar joining the Australian dollar and oil prices in the 17-year-plus low club. Developing world currencies also hit new lows, for the most part. In stock markets, Asian markets dropped sharply, with circuit breakers were hit in South Korea, the Philippines and Indonesia, though some markets managed to pare intraday losses, as did S&P 500 futures. MSCI Asia-Pacific (ex-Japan) index shed 5% in posting a fresh four-year low, while European stocks managed to stabilize. Policy responses continued to come. The RBA cut its cash rate 25 bp to a record low of 0.25% while announcing its first ever QE program. This was joined by fresh emergency central bank measures from the BoJ, Fed and ECB. These actions come with many countries having announced massive rescue packages to counter the catastrophic economic consequences that global measures to contain the coronavirus is having. The concern remains that such efforts won't have much impact while major economies remain in lockdown, or partial lockdown. Markets also face the uncertainty of when the coronavirus will be beaten, though a glimmer of hope came from China, which reported no new locally transmitted cases for the first time.

    [EUR, USD]
    EUR-USD has printed a fresh one-month low at 1.0796, surpassing yesterday's low at 1.0802. The pair has unwound nearly all of the 5%-odd gains seen from late February through to the March-9th high at 1.1494 high. The decline has been driven by demand for dollars with investors in crisis-discombobulated markets stampeding to meet fund redemptions. Yield differentials and fundamentals have gone out of the window, for now. The narrow trade-weighted USD index (DXY) has posted a new three-year high, at 101.87. We expect EUR-USD to remain downwardly biased for now. The ECB launched a EUE 750 bln pandemic emergency program, which was put to work immediately, buying sovereign paper of stressed peripheral Eurozone countries. The impact includes a 60-plus-basis-point drop in the 10-year BTP yield, which put the Italian benchmark yield back under 1.70%, after scaling to highs near 3% yesterday. Incoming Eurozone data are starting to show the impact of the coronavirus, with the March German Ifo business sentiment gauge falling to its worst reading since the 2008-9 financial crisis.

    [USD, JPY]
    The yen has for now given up its safe-haven crown to the dollar, which has been underpinned by investors wanting cash dollars to meet fund redemptions. USD-JPY has consequently rallied by over 6% from the 40-month low seen on March 9th at 101.19. The Japanese currency has also ebbed against the euro over this period, but has still managed gains versus many other currencies, including the pound, dollar bloc and most developing-world currencies. The BoJ today made two unscheduled bond purchases totalling 1.3 tln yen, which was one of several emergency measures taken by central banks during the Asian session today, including from the Fed, ECB and RBA. Assuming that the coronavirus continues to heighten for some months yet, which looks likely, we would expect the yen to return to favour as safe haven. Regarding the coronavirus, many countries have also been announcing massive rescue packages to counter the catastrophic economic consequences that global measures to contain the coronavirus is having. The concern remains that such efforts won't have much impact while major economies remain in lockdown, or partial lockdown. Markets also face the uncertainty of when the coronavirus will be beaten. A glimmer of hope has come from China, which reported no new locally transmitted cases for the first time.

    [GBP, USD]
    The pound posted a fresh 11-year low against the euro, with EUR-GBP pegging a high at 0.9502 in Asian trading, before arrival of the London interbank. The cross has since corrected to around 0.9400. Cable, meanwhile, has remained heavy after yesterday posting a 35-year low at 1.1466. Sterling tends to find itself on the underperforming list of currencies during protracted periods of risk-off positioning in global markets is a consequence of the UK's dependence on foreign investment to fund its current account deficit. New BoE governor Andrew Bailey picked up the reins on Monday. His first Monetary Policy Committee meeting as governor will be on Wednesday and Thursday next week (announcing March 26th). A further 25 bps cut looks likely, which would take the repo rate to zero. An expansion in the QE program is also on the cards. The UK government this week announced a GBP 330 bln coronavirus rescue package.

    [USD, CHF]
    EUR-CHF has settled back under 1.0600, but remains above the five-year low that was seen last Monday at 1.0505. Safe haven demand for the Swiss currency has returned amid heightening concerns about the global economic disruptions being caused by efforts to contain the coronavirus. 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. The Swiss central bank kept its policy rates unchanged at -0.75% today following its quarterly policy meeting, as had been widely expected. The SNB acknowledged the impact of virus developments, which also put upward pressure on the franc, and pledged that it will step up forex interventions to keep the currency under control. The SNB said growth will be likely be negative this year, and that it is considering to reduce the countercyclical capital buffer (the German equivalent of this was cut to zero yesterday). The exemption threshold for the negative rates will be lifted, and while the SNB stressed that the banking system has sufficient liquidity for now, policymakers also emphasized that it will ensure that this stays like that. There are reports that the SNB is in talks with commercial banks, and that there may be announcements on additional steps later in the week or over the weekend.

    [USD, CAD]
    The Canadian dollar joined the club of currencies and commodities trading at 17-year-plus lows, with USD-CAD climbing for what is now a 12th day out of the last 13 to a 1.4668 high. Oil prices, with which the Canadian currency correlates with, yesterday hit an 18-year low. The Canadian dollar and other dollar bloc currencies have been underperforming amid the recent backdrop of acute risk-aversion in global markets. Sustained declines in oil prices erode Canada's terms of trade. The dollar bloc currencies will remain subject to volatility and overall underperformance as long as the coronavirus contagion remains in a state of increasing spread.

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