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By XE Market Analysis March 20, 2020 7:28 am
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    XE Market Analysis: North America - Mar 20, 2020

    The dollar has taken a rotation lower following interventions and the threat of interventions over the last day, while commodity and many developing world currencies have rebounded strongly following a period of pronounced underperformance. Also in the mix is the plethora of central bank actions to shore up liquidity and loosen monetary policy, which, along with the massive fiscal rescue packages being assembled by governments across the world, have given markets opportunity to take a reprieve from coronavirus anxiety. Russia and Brazil have intervened in forex markets over the last day, buying their domestic currencies and selling dollars. The Russian ruble crashed by over 34% from early January levels before the Russian central bank stepped in yesterday. The Norwegian central bank also threatened to intervene yesterday following a similar 30%-odd dive the crown. South Africa and Australia have also signalled readiness to intervene to support their currencies. For many countries with borrowings in dollars, the massive depreciation in their domestic currencies, and strength in the dollar, has been increasingly threatening at a time when most emerging market and developed-world economies are either headed to or are already in recession. There is rising odds for coordinated action to blunt dollar strength. Demand of cash dollars has been intense in recent weeks due to the funds need to cover losses and meet fund redemptions. Among the main currencies today, the narrow trade-weighted dollar index (DXY) dove to a 101.09 before recouping to the upper 101.0s. The index peaked at a 38-month high yesterday at 102.99. EUR-USD concomitantly lifted by over 1% to levels above 1.0800, before ebbing back to the lower 1.0700s. Cable rallied by nearly 3% to levels back above 1.1800, up from yesterday's 35-year at 1.1451. USD-JPY dropped back to the 109.00s from levels above 111.0, though the yen still weakened against many other currencies. The biggest mover has been the Australian dollar, which has rebound by 4% to the 0.5900s, up from yesterday's 18-year low at 0.5507.

    [EUR, USD]
    EUR-USD has come of its rebound high at 1.0832, ebbing back to the lower 1.0700s but so far remaining above yesterday's three-year low at 1.0653. The pair continues to be driven by broader swings in the dollar. The narrow trade-weighted dollar index (DXY) has lifted back towards 102.00 during the London morning after posting a correction low at 101.09. The index peaked at a 38-month high yesterday at 102.99. Interventions to sell dollars versus domestic currencies were seen in Brazil and Russian over the last day, among other places, while the likes of Norway, South Africa and Australia have been among those threatening to do so. Demand of cash dollars has been intense in recent weeks due to the funds need to cover losses and meet fund redemptions. We still anticipate EUR-USD to remain directionally biased to the downside, with aggressive coronavirus containment measures remaining in the upswing and likely to keep global markets under pressure, in turn feeding demand for dollars.

    [USD, JPY]
    USD-JPY dropped back to the lower 109.00s from levels above 111.0, though the yen still weakened against many other currencies. The yen has for now given up its safe-haven crown to the dollar, which has been underpinned recently by investors wanting cash dollars to meet fund redemptions. USD-JPY consequently rallied by over 6% from the 40-month low seen on March 9th at 101.19, reaching a peak at 111.32 before today's correction. 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]
    Cable came off its rebound highs but was still up strongly after rallying by over 3% to the upper 1.1800s, rebounding from yesterday's 35-year at 1.1451. Sterling is also up from the 11-year lows it saw against the euro. The UK currency has generally been performing similar to a commodity currency during the recent phases of acute risk-off positioning in global markets. The UK runs a relatively big currency account deficit, and this exposes the currency during heightened risk aversion. We saw this during the 2008 crisis, with BoE's real effective exchange rate measure of the pound tumbled by 16% in the three months following the collapse of Lehman Brothers in September 2008. There are three aspects to the current account, one being the net balance of currency remittances, another the trade balance, and the third being the net balance of investment flows. The imbalance between foreign investors holding UK assets versus UK investors holding foreign assets, and the returns thereof, is the source of the pound's risk-off underperformance. During times of high stress, the net investment flow -- what is needed to finance the deficit -- turns from being UK-inward to UK-outward. (In the dollar's case, the currency is being underpinned despite the U.S. current account deficit, due to its role as the world's reserve currency). Some market narratives have also been mooting that Brexit has rendered the pound more vulnerable. New BoE governor Andrew Bailey picked up the reins on Monday. He first policy move was to cut cut the repo rate to a record low 0.1% while expanding the QE program, which was announced on Thursday afternoon. 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% yesterday 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 central bank 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]
    USD-CAD has corrected by over 2% in making low at 1.4150, which put in some distance in from the four-year high seen yesterday at 1.4468. Oil prices, with which the Canadian currency correlates with, have rebound out of the 18-year lows seen on Wednesday. WTI futures gained over 6% today in reaching levels back above $27.50, which is about a 37% rebound from the low seen at $20.06. The Canadian dollar and other dollar bloc currencies have been underperforming amid the recent backdrop of acute risk-aversion in global markets, though all have managed to rebound today amid a broad correction in the dollar following various forex interventions in developing markets and threats of intervention elsewhere. The plethora of monetary and fiscal responses to the coronavirus induced economic dislodgements have also helped markets finds some reprieve. The dollar bloc currencies will contiue to remain subject to volatility and overall underperformance as long as the coronavirus contagion remains in a state of increasing spread.

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