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By XE Market Analysis March 31, 2020 7:12 am
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    XE Market Analysis: North America - Mar 31, 2020

    The dollar has traded firmer for a second day, rebounding from recent underperformance, which had been a reflection of the Fed's aggressive actions to satiate demand for dollars. More broadly, global markets have settled in what are comparatively narrowly ranges by recent standards. The commodity currencies have traded softer, suggesting there is little buy-in to a sustained improvement in global market sentiment, despite gains in stock markets. AUD-USD punched out a four-day low at 0.6079, extending the correction from Friday's two-week high at 0.6202. The latter high was the culmination of a rally from the 17-year low that was seen on March 19th at 0.5507. USD-CAD, meanwhile, reached a six-day high, at 1.4246, despite a 5%-plus rebound in oil prices, which remain down by 65% year-to-date. The narrow trade-weighted USD index (DXY) lifted by 0.5% in making a four-day high at 99.73, extending the rebound from Friday's low at 98.29, but remaining comfortably below the 38-month high seen on March 23rd at 102.98. EUR-USD concurrently ebbed below Monday's low in reaching a low at 1.0948, and Cable printed a four-day low at 1.2256. USD-JPY posted a four-day high at 108.72. There was a batch of data out of the Asia-Pacific region today. China's official PMI surveys for March showed an eye-popping rise to 52.0 in the headline manufacturing reading, and a rise to 52.3 in the services PMI headline, indicating both sectors are back in expansion, though there is widespread incredulity about the accuracy of the data. This said, VW reported that is has resumed production in 22 of its 24 plants in China, reaffirming the picture of resuming work in the country. Japan retail sales and production data beat forecasts, but were accompanied by official warnings that the data ahead will better reflect the impact of the virus-containment measures. South Korea industrial output, meanwhile, hit at nine-year low, Australian consumer confidence dove to a record low, and New Zealand business confidence tipped to -63.5 in the latest ANZ survey from -19.4 in the month prior, with indications pointing to an even worse figure next month. Regarding the coronavirus, there are tentative signs that the lockdown is working. The UK, for instance, reported that growth in hospital admittances is no longer accelerating. However, the global death rate is still rising exponentially, and probably won't hit peak for some weeks.

    [EUR, USD]
    EUR-USD posted a decline of 0.7% in making a four-day low a 1.0967. The pair has continued to be mostly driven by broader directional dynamics of the dollar, with the narrow trade-weighted USD index (DXY) lifting for a second day, by 0.5% in making a four-day high at 99.68, extending the rebound from Friday's low at 98.29. The dollar still remains comfortably below the 38-month high seen on March 23rd at 102.98, which was set before the Fed stepped in with aggressive actions to satiate the crisis-induced demand for dollars. 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 troughed last Wednesday at 110.5 bp, since tracking back above 115.0 bp, with EUR-USD concurrently coming off the boil. Bigger picture, what the relative political and economic impact that virus-containing measures will have in Europe and the U.S. are unclear, though the issue of the viability of the euro and the EU itself is once again being held in doubt by euroskeptics. The Eurozone 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]
    USD-JPY posted a four-day high at 108.72, buoyed by a generally firmer dollar, while yen crosses have traded mixed on what is month- and quarter-end, and the end of Japan's fiscal year. There were a batch of data out of the Asia-Pacific region today. China's official PMI surveys for March showed an eye-popping rise to 52.0 in the headline manufacturing reading, and a rise to 52.3 in the services PMI headline, indicating both sectors are back in expansion, though there is widespread incredulity about the accuracy of the data. This said, VW reported that is has resumed production in 22 of its 24 plants in China, reaffirming the picture of resuming work in the country. Japan retail sales and production data beat forecasts, but were accompanied by official warnings that the data ahead will better reflect the impact of the virus-containment measures. South Korea industrial output, meanwhile, hit at nine-year low, Australian consumer confidence dove to a record low, and New Zealand business confidence tipped to -63.5 in the latest ANZ survey from -19.4 in the month prior, with indications pointing to an even worse figure next month. Regarding the coronavirus, there are tentative signs that the lockdown is working. The UK, for instance, reported that growth in hospital admittances is no longer accelerating. However, the global death rate is still rising exponentially, and probably won't hit peak for some weeks. Italy's government said it may extend its lockdown until May 4, too. 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.

    [GBP, USD]
    The pound was showing of nearly 1% at its lows against the dollar, and also posted losses against the euro and yen, and most other currencies. Cable hit a four-day low at 1.2255, extending the correction from the 18-day high that was seen last Friday at 1.2486 (which was the culmination of a 9%-plus rebound from the 35-year low that was seen on March 20th at 1.1409). The pair subsequently recouped to the lower 1.2300s. The pound continues to registers as an underperformer on the year-to-date, down by about 7% versus the dollar, and by 6% and 7% down against the euro and yen, respectively. We expect the UK currency will remain vulnerable so long as global markets remain apt to risk aversion, or at least unable to sustain rebounds, which might prove to be the case while there remains uncertainty about the duration major economies will remain in a state of lockdown. The UK's dependency on foreign investment to fund its current account deficit is the Achilles' heel of the pound that is exposed during persisting eras of acute risk aversion in global markets. 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 continued to gravitate around the 1.0600 level, holding above the five-year low that was seen on March 9th at 1.0505. Assuming the coronavirus crisis persists, as looks highly likely, this should maintain Swiss franc's safe haven premium, which at the least should limit upside scope of EUR-CHF. 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 reached a six-day high, at 1.4208, despite a 5%-plus rebound in oil prices, which are still down by 65% year-to-date. This level of price decline in Canada's principal export, while it sustains, marks 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 that the Canadian dollar will remain apt to underperformance. We see USD-CAD revisiting its recent 17-year high at 1.4669 before long.

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