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By XE Market Analysis March 26, 2020 7:35 am
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    XE Market Analysis: North America - Mar 26, 2020

    Dollar weakness emerged as the dominant theme in currency markets, even against the commodity currencies amid a risk-off backdrop, while managed to rebound from weakness seen during the early part of Asia-Pacific session trading today. AUD-USD, for instance, printed a two-day low at 0.5780 in Sydney before recouping a big figure to a 0.5881 high. The pair still remains well off its Wednesday peak at 0.6074. USD-CAD dropped to a nine-day low at 1.4115, despite a concurrent 3% drop in oil prices, which is testament to the impact that the Fed's tap of unlimited dollar supply is having. The narrow trade-weighted USD index (DXY), now amid its third consecutive down day, posted an eight-day low at 100.25 in falling by just over 0.7% on the day. EUR-USD concomitantly lifted for what is a fifth consecutive day of gains, clocking a one-week high at 1.0969. USD-JPY has registered the biggest movement out of the main currencies, and was showing a 1.2% decline as of the late London AM session. The pair hit a three-day low at 109.82. Yen crosses also declined, reflecting yen outperformance amid a richening in safe haven premiums against a backdrop of falling global stock and commodity markets. Much focus is now being put on the upcoming weekly U.S. jobless claims data, which will lay bare the economic consequences that aggressive world-wide measures to contain the coronavirus is having on the world's biggest economy. We expect a surge to 3.0 mln after the 70k increase to 281k previously as coronavirus layoffs are counted in earnest. Regarding the coronavirus, the fact that factories have been returning to operations in China only to downsize staffing levels due to the plummet in global demand shows that all the stimulus in the world simply won't be able to make for the widespread lockdowns in global economies while they last.

    [EUR, USD]
    EUR-USD has lifted for what is now a fifth consecutive day, buoyed by the billowing cushion of unlimited Fed supply of dollars. The pair clocked a one-week high at 1.0951, and needs to close above 1.0882-83 today to maintain the nascent run of successively higher closing levels. Given the Fed's commitment, we expect EUR-USD to remain underpinned. Incoming Eurozone data continue to paint an unambiguously sharply deteriorating economic picture, with German consumer sentiment data showing a pronounced slump. Much focus is now being put on the upcoming weekly U.S. jobless claims data, which will lay bare the economic consequences that aggressive world-wide measures to contain the coronavirus is having on the world's biggest economy. We expect a surge to 3.0 mln after the 70k increase to 281k previously as coronavirus layoffs are counted in earnest.

    [USD, JPY]
    The yen has firmed amid renewed richening in safe haven premiums, though remains below recent peaks (well below in the case against the dollar). USD-JPY has posted a three-day low at 109.82. The global stock market rebound faltered in Europe and Asia, and S&P 500 futures have more than reversed the 1.15% closing gain that the cash version of the index saw yesterday on Wall Street. Oil prices have rotated about 3% lower. Overall, there is seems to be a feeling among market participants that asset markets may be entering a stasis-at-much-lower-levels phase following the historically sharp declines in recent weeks, which could mean that currencies are set for a choppy consolidation period. The fact that factories have been returning to operations in China only to downsize staffing levels due to the plummet in global demand shows that all the stimulus in the world simply won't be able to make for the widespread lockdowns in global economies while they last.

    [GBP, USD]
    The pound has capped out following two days of outperformance. Cable yesterday left an eight-day high at 1.1976, since settling to the lower 1.1900s. The pairing is still showing a sizeable 10.0% decline on the year-to-date. The pound also remains down by 8.5%-9% versus 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 remained heavy despite a 3%-plus rotation low in oil prices today, which is testament to the Fed's efforts to flood markets with dollars. 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 has been having some impact in helping markets finds a sustainable reprieve.

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