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By XE Market Analysis March 30, 2020 4:40 am
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    XE Market Analysis: North America - Mar 30, 2020

    The dollar has traded steady-to-firmer against the other main currencies so far today. Influenced by a 0.5% decline in EUR-USD, the narrow trade-weighted USD index (DXY) lifted to a 98.98 high, over 60 pips up on Friday's closing level and setting the index up for its first daily gain since last Monday. The yen has also traded firmer versus most currencies, especially the European units, which have underperformed moderately. The dollar bloc currencies are modestly lower amid a backdrop of sputtering global stock markets. USD-JPY edged out a 12-day low at 107.14 before recouping to the upper 107.0s. AUD-USD, like other pairings, has held a relatively narrow range by recent standards, of 0.6113 - 0.6184, holding below Friday's two-week high at 0.6202. USD-CAD lifted above Friday's high in making peak at 1.4097. This comes with oil prices once gain taking a tumble. Front-month WTI prices hit a low at $19.92, which is the lowest level since the two-decade low seen on March 20th. The euro, sterling and Swiss franc have underperformed so far today posting declines of around 0.5%-0.6% against the dollar. EUR-USD posted a low at 1.1056 after closing on Friday at 1.1148-50. A close today below the latter levels would mark the first down day the pairing has seen since March 19th. Overall, currency pairings have remained within recent ranges, and global markets have traded relatively calmly so far today. The major concern remains that the massive global stimulus efforts announced to-date simply won't be able to offset the full consequences of economies being in a frozen state of lockdown, a situation that looks likely to endure for several months. JP Morgan is currently forecasting world GDP to contract by 10.5% in the first half of the year alone. Most expect a strong recovery "on the side" of the crisis.

    [EUR, USD]
    EUR-USD has posted a low at 1.1056 after closing on Friday at 1.1148-50. A close today below the latter levels would mark the first down day the pairing has seen since March 19th, over which time the euro rallied from a 35-month low at 1.0637. The narrow trade-weighted USD index (DXY) concomitantly lifted to a 98.98 high, over 60 pips up on Friday's closing level and setting the index up for its first daily gain since last Monday. The recent pronounced narrowing in the dollar's yield advantage over the Eurozone, driven by the Fed's aggressive monetary policies, looks to have based out for now. The U.S. 10-year T-note versus Bund yield differential based last Wednesday at 110.5 bp, and has since steadied, tracking back above 115.0 bp, with EUR-USD concurrently coming off. Bigger picture, what the relative political and economic impact that virus-containing measures will have in Europe and the U.S. are unclear. The issue of the viability of the euro and the EU itself is once again being held in doubt by euroskeptics, while the countries so-far hardest hit by the virus in Europe -- Italy, Span and France -- have the least fiscal room for manoeuvre. On balance, we still remain bearish of EUR-USD.

    [USD, JPY]
    The yen has traded firmer versus most currencies, especially the European units, which have underperformed moderately so far today. USD-JPY edged out a 12-day low at 107.14 before recouping to the upper 107.0s. Risk appetite has neither been here nor there, though a negative sentiment looks to be building. Asian stock markets sputtered, while S&P 500 futures have traded both in the negative and in the positive, while most European indices pared intraday losses. Currency flows into tomorrow's month- and quarter-end, along with Japanese fiscal year ending, may generate some choppy near-term price action in the yen. Bigger picture, we expect the Japanese currency to remain a safe haven. The major concern remains that the massive global stimulus efforts announced to date simply won't be able to offset economies in a frozen state of lockdown, a situation that looks likely to endure for several months. JP Morgan is currently forecasting world GDP to contract by 10.5% in the first half of the year alone. The exponential rate of new coronavirus cases globally 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. We continue to anticipate USD-JPY trading at sub-100.00 levels.

    [GBP, USD]
    Cable is softer today after rallying last week. The pair posted a 17-day high at 1.2486 on Friday, which was the culmination of a rebound from the 35-year low that was seen on March 20th at 1.1409. The pairing has settled in the upper 1.2300s, near 1.2400. About two thirds of the rebound from the major-trend low reflected a broader turn lower the dollar, at the influence of the Fed's policies, while the broad stabilization in global markets last week gave the pound a chance to rebound, having underperformed markedly during the recent acute periods of risk aversion. Despite the impressive rebound, the pound still remains, at levels prevailing, down by about 7% versus the dollar on the year-to-date, and by 6% and 7.5% down against the euro and yen, respectively, over the same period. We expect the UK currency to remain vulnerable over the coming months. The coronavirus crisis is far from over, and we expect global markets to remain apt to risk aversion, despite massive global stimulus efforts, or at least unable to sustain rebounds, so long as major economies remain in a state of lockdown. This is a negative backdrop for sterling, given the tendency for there to be a shortfall in foreign investment during troubled times to finance the UK's current account deficit. Brexit also remains a blot on the pound's landscape with Boris Johnson's government 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, however, opt for an extension in the transition period.

    [USD, CHF]
    EUR-CHF has flapped back under the 1.0600 level as risk aversion picks up again in global markets. A revisit of the five-year low that was seen on March 9th at 1.0505 looks more likely than not, assuming the coronavirus persists, as looks highly likely, which should maintain the Swiss franc's safe haven premium. 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 lifted above Friday's high in making peak at 1.4124. This comes with oil prices once gain taking a tumble. Front-month WTI prices hit a low at $19.92, which is the lowest level since March 20th, when crude prices hit a their lowest since 1999 (in nominal terms). Oil prices are down by a massive 67% on the year-to-date, and losses are sustaining, marking a significant deterioration in the Canadian economy's terms of trade. Given the glut of crude flooding the market and storage facilities, and given that demand will remain weak for a historically protracted amount of time, we anticipate a resumption in Canadian dollar weakening, with USD-CAD seen revisiting its recent 17-year high at 1.4669 before long.

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