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By XE Market Analysis March 25, 2020 7:34 am
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    XE Market Analysis: North America - Mar 25, 2020

    The commodity and many developing world currencies pared gains against the dollar, yen and Swiss franc. The pound also continued to outperform for a second day. Asian stock markets rallied after the DJIA equity index posted its biggest single-day rally on Wall Street since 1933, though European markets gave up early gains, while S&P 500 futures ebbed back, and were showing a 0.8% decline as of the late London AM session. The U.S. Senate and White reached agreement on a $2 tln fiscal stimulus package, which joins a growing list of countries around the world to have unveiled bazooka-sized spending packages that are complementing ambitious central bank monetary stimulus efforts aimed at mitigating the impact of virus containing measures. This comes amid tentative signs that the lockdown in Italy is starting to work. But, confirmed cases globally continue to rise exponentially and significant uncertainties remain. All the stimulus in the world isn't going to re-start the global economy while national lockdowns -- which now cover a third of the world's population -- persist. Among the main currencies, USD-JPY has traded neutrally, while most yen crosses, especially those with a commodity or developing world currency counterpart, rallied to fresh rebound highs before ebbing back. USD-JPY has held with a range of 110.75-111.58, narrow by recent standards and well within the bounds of yesterday's range. EUR-JPY posted a three-week high, at 120.90. AUD-JPY, amid its fifth consecutive up day, posted a 13-day high at 67.79, though subsequently fell below 67.00. AUD-USD pegged an eight-day high at 0.6073 before ebbing back towards 0.6000, though remaining over 9% up on last week's 18-year low. USD-CAD sprang back above 1.4400 after oil prices turned lower after an Asia-session rally. The pair had earlier printed a five-day low at 1.4295, concomitantly with oil prices hitting a five-day peak. EUR-USD has traded modestly higher, to the lower 1.0800s, remaining comfortably within Tuesday's range.

    [EUR, USD]
    EUR-USD has traded modestly higher, to the mid 1.0800s, but has remained comfortably within Tuesday's range. The pair yesterday printed a five-day high at 1.0889, and is, on a daily closing level basis, amid its four consecutive day of ascent. A close today above 1.0789-90 is needed to maintain this nascent trend, which has been a product of the Fed's ultra-aggressive pledge of unlimited dollar supply. Given the Fed's commitment, we expect EUR-USD to remain underpinned.

    [USD, JPY]
    USD-JPY has traded neutrally so far today, while most yen crosses, especially those with a commodity or developing world currency counterpart, have lifted, with Asian stock markets gaining after Wall Street closed with its best single-day gains since 1933 as countries around the world unveil bazooka fiscal spending packages to join huge central bank monetary stimulus efforts aimed at mitigating the impact of virus containing measures. USD-JPY has held with a range of 110.75-111.58, narrow by recent standards and well within the bounds of yesterday's range. EUR-JPY has posted modest gains, but remained below yesterday's peak. AUD-JPY, NZD-JPY and CAD-JPY, meanwhile, have seen gains of between 0.9% and 1.5%, reflecting an unwinding in risk-off positioning. AUD-JPY, amid its fifth consecutive up day, posted a 13-day high at 67.70. Ahead, significant uncertainties remain. All the stimulus in the world isn't going to re-start the global economy while national lockdowns -- which now cover a third of the world's population -- persist. While we can conjecture how long these lockdowns will last, it remains, as yet, hard to know what risk there will be of a second wave of infection once they are lifted, or will countries, once their medical services have been bolstered (with widespread testing, more respirators, a full supply of coronavirus-grade face masks etc) will opt to get back to work, such as President Trump has been mooting, and if so, how effective and how publicly acceptable this would be. From here, we still anticipate further risk-off positioning in markets. We are anticipating sub-100.00 levels will be seen in USD-JPY, aided by the Fed's unlimited tap of dollars via money market liquidity operations and QE activity.

    [GBP, USD]
    The pound has for a second day outperformed the other major currencies, and also the dollar bloc units today. Cable is showing a 1.6% gain, as is GBP-JPY, while sterling is up by 1.1% against the euro. Cable has printed a one-week at 1.1972, marking a gain of well over 5 big figures from the 35-year low that was seen on Friday, at 1.1409. The pairing is still showing a sizeable 10.0% decline on the year-to-date. The pound also remains down by over 7% versus both the euro and yen over this period. We have been noting that the UK currency had been trading similar to a commodity currency lately, significantly underperforming its major-currency peers during phases of acute risk-off positioning, so it shouldn't be too surprising to see the pound outperform during the rebounds. The currency is vulnerable to sustained periods of risk-aversion in global markets due to the UK's large current account deficit, particularly the part of it derived from foreign investors in UK assets, which dwarfs UK investors foreign investments and sets up an imbalance when it comes to capital repatriation. Then there is Brexit -- with Boris Johnson's government still aiming to take the UK out of its special transition membership of the EU's customs union and single market at the end of the year, which would put a large part of UK trade on less favourable WTO terms (we think Johnson will ultimately opt for an extension in the transition period). The BoE's Monetary Policy Committee meets today and tomorrow, when it will release the minutes from last week's decision to cut the repo to 0.1% and expand QE. The UK government is implementing an aggressive stimulus package to counter the impact of virus-containing measures, billed as an "employment retention" coronavirus support package, which aims to keep the economy primed for a V-shaped rebound by paying up to 80% of employees pay in businesses that have been forced to suspend trade.

    [USD, CHF]
    EUR-CHF has nudged above 1.0600 as a modicum of risk appetite returns to global markets, which has seen the price premiums of safe havens such as the Swiss franc fall back. The gains put a little extra distance in from the five-year low that was seen on March 9th at 1.0505. 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 ebbed to a five-day low at 1.4295, with the Canadian dollar continuing to correlate closely with oil prices, which today have posted to a five-day high. The Canadian dollar and other commodity currencies will continue to remain subject to volatility and overall underperformance as long as the coronavirus contagion remains in a state of increasing spread, though the plethora of global monetary and fiscal responses to the coronavirus induced economic dislodgements appear to be having some impact in helping markets finds a sustainable reprieve.

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