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By XE Market Analysis March 27, 2020 7:37 am
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    XE Market Analysis: North America - Mar 27, 2020

    The dollar declined and then recovered some of its losses, which saw the narrow trade-weighted USD index (DXY) print a nine-day low at 99.15 before recouping levels back above 99.50 . At the lows, the index was showing a correction of 3.2% from the 38-month high that was seen last week, which can be credited to the Fed's ultra aggressive dollar printing activity. There has also been a side theme of pronounced losses in USD-JPY and yen crosses, with demand for yen during the Tokyo session reportedly driven by repatriation of Japanese investment funds, according to several market reports and narratives (Japan's financial year-end is nigh). USD-JPY, aided by broad dollar weakness, dropped by about 1% in printing a one-week low at 108.25 before finding a footing. EUR-JPY, AUD-JPY and most other yen crosses declined, too. Elsewhere, EUR-USD edged out a 10-day high at 1.1087, before ebbing back under 1.1050. Cable printed an eleven-day high, at 1.2306. As for the coronavirus, the exponential rate of new cases has continued. Cases in the U.S. have surged, and it might be several weeks before the benefits of the global lockdown are seen. Few are now expecting a V-shaped economic recovery out of this, such as was seen following the SARS epidemic in Asia in 2003. The only question is how wide the "U" with be in a U-shaped recovery.

    [EUR, USD]
    EUR-USD has ebbed back from a 10-day high that was printed at 1.1087 during the Asian session. The high extended the rebound from the 35-month low that was seen last week at 1.0637, and was the product of dollar weakness, which concurrently saw the narrow trade-weighted USD index (DXY) peg a nine-day low at 99.15. At the lows, the index was showing a correction of 3.2% from the 38-month high that was seen last week, which can be credited to the Fed's ultra aggressive dollar printing activity. Given the Fed's level of commitment, we expect EUR-USD to remain biased to the upside for now.

    [USD, JPY]
    USD-JPY and yen crosses traded lower, which had looked out of sync with the usual correlative pattern in light of a backdrop of mostly-higher stock and commodity markets in Asia today, though risk appetite subsequently turned to the negative, with European and U.S. index futures coming under pressure as the three-day rebound faltered. The demand for yen during the Tokyo session was driven by repatriation of Japanese investment funds, according to several market reports and narratives, even though the timing, just a few days before Japan's financial year end, seems a little strange. USD-JPY, aided by broad dollar weakness, dropped by about 1% in printing a one-week low at 108.25. EUR-JPY, AUD-JPY and most other yen crosses declined, too, correcting after their recent spurt higher. Subsequently, the yen gave back up to half of its gains as the European interbank market picked up the reins. As for the coronavirus, the exponential rate of new cases has continued. Cases in the U.S. have surged, and it might be several weeks before the fruits of the global lockdown is seen. Few are now expecting a V-shaped economic recovery out of this, such as was seen following the SARS epidemic in Asia in 2003. The only question is how wide the "U" with be in a U-shaped recovery. We continue to anticipate much more risk-wary trading ahead, and see USD-JPY at sub-100.00 levels.

    [GBP, USD]
    Cable printed an 11-day high at 1.2306 amid a broad bout of dollar weakness, before correcting back under 1.2200. At the high today, the pound had racked up a 8 big figure gain from the 35-year low that was seen last week at 1.1409. About two thirds of this rebound from major-trend lows reflected the broader turn lower the dollar, at the influence of the Fed's policies, while the broad stabilization in global markets in recent days gave the pound a chance to rebound, having underperformed markedly during the recent acute periods of risk aversion. The BoE's March Monetary Committee Meeting, which concluded yesterday, was something of a non-event for markets, with policy settings left unchanged, although it provided an opportunity for it to justify its recent emergency moves to cut the repo rate from 0.75% to 0.10% while expanding its purchase program. The central bank stressed that it could further expand QE, if necessary. There was an emergency liquidity operation of GBP 11.13 bln ($13 bln) via the Contingent Term Repo Facility, which was activated this week to cover the huge demand for cash. Another operation will be held on April 2. The BoE, unsurprisingly, expects a very sharp reduction in economic activity and risk of longer term damage to the economy as a consequence of the coronavirus. Despite the rebound over the last several sessions, the pound at prevailing levels still remains over 8% down on the dollar on the year-to-date, and by between 7% and 8% down versus the euro and yen. We are not anticipating a full recovery given the shortfall in foreign investment in the prevailing trouble times to finance the UK's current account deficit. We expect the government will before long extend the Brexit transition period, which keeps the UK in the EU's customs union and single market, beyond the end of the year.

    [USD, CHF]
    EUR-CHF has nudged above 1.0600 as a level 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 ebbed to a 10-day low at 1.3987. The Canadian dollar, like other commodity currencies, has been trading firmer amid the rebound in equity markets this week. Oil prices have been choppy, though have stabilized above the major-trend lows that were seen last week. At the same time, the Fed's aggressive actions has been keeping the U.S. dollar on a back foot. The Canadian dollar has been been faring less well versus currencies other than the U.S. buck, for the most part. Oil prices are down by over 62% on the year-to-date, and remain near levels last seen in 2002 (in both nominal and inflation-adjusted prices), which, if sustained, would mark a significant deterioration in the Canadian economy's terms of trade.

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