XE Market Analysis: Europe - Feb 17, 2020

The dollar and most other currencies have been stable in quiet early-week trading so far. This came with the main Chinese equity indices posting 2%-plus gains after China's Finance Minister said on Sunday that Beijing would roll out targeted and phased tax and fee cuts and with the PBoC lowering one of its interest rates and making another liquidity injection. Other stock markets in Asia were mixed. The number of new cases in the coronavirus continued to increase, though the consensus view seems to remain that peak contagion will likely been seen in March. Japan's Nikkei 225 underperformed, closing with a 0.7% loss following weaker than expected Q4 GDP data, which showed a 1.6% q/q contraction versus the median forecast for -0.9%. Q3 data were also revised down, and the data come amid expectations for a dismal current quarter performance given the impact of measures to contain the virus outbreak in China and Japan, and elsewhere. Among the main currencies, EUR-USD has been plying a narrow range just above the 34-month seen on Friday at 1.0827. EUR-JPY and EUR-CHF have been doing likewise about their respective four-month and five-year lows of Friday. USD-JPY has posted a sub-15 pip range just below Friday's 107.91 peak so far. Cable has continued to consolidate gains seen mid last week following signs that the government is gearing up a fiscally expansive policy. The pair has been holding with about 1.3030-50, off from the two-week high of last Thursday at 1.3069. AUD-USD has traded slightly firmer, managing to lift just above its Friday high in making a peak at 0.6733. USD-CAD edged out a two-week low, at 1.3233. A big focus will be on flash manufacturing PMI surveys for February, due at the end of the week out of Eurozone, UK and U.S. Note that U.S. markets will be closed today.

[EUR, USD]
EUR-USD has been plying a narrow range just above the 34-month seen on Friday at 1.0827. EUR-JPY and EUR-CHF have been doing likewise about their respective four-month and five-year lows of Friday. With regard to EUR-USD specifically, the dollar has been underpinned by the relative robustness of the U.S. economy, and continues to register as the strongest main currency on the year-to-date, with gains of around 4.5% versus the weakest, the Australian and New Zealand dollars. EUR-USD pair has been trending lower since early 2018, dropping from levels near 1.2500. Although the Fed has backed out of its tightening phase after hiking rates three times last year, the dollar has been finding an underpinned via safe haven demand for Treasuries. The Eurozone economy, meanwhile, has been showing signs of sputtering.

[USD, JPY]
USD-JPY has been trading narrowly just below Friday's 107.91 peak so far today. This has come with the main Chinese equity indices posting 2%-plus gains after China's Finance Minister said on Sunday that Beijing would roll out targeted and phased tax and fee cuts and with the PBoC lowering one of its interest rates and making another liquidity injection. Other stock markets in Asia were mixed. The number of new cases in the coronavirus continued to increase, though the consensus view seems to remain that peak contagion will likely been seen in March. Japan's Nikkei 225 underperformed, closing with a 0.7% loss following weaker than expected Q4 GDP data, which showed a 1.6% q/q contraction versus the median forecast for -0.9%. Q3 data were also revised down, and the data come amid expectations for a dismal current quarter performance given the impact of measures to contain the virus outbreak in China and Japan, and elsewhere. Assuming the virus doesn't worsen (as measured by the rate of contagion and rate of deaths), USD-JPY is likely to track higher.

[GBP, USD]
Cable has continued to consolidate gains seen mid last week following signs that the government is gearing up a fiscally expansive policy. The pair has been holding with about 1.3030-50, off from the two-week high of last Thursday at 1.3069. On the year-to-date, and from the mid-December election, the pound has been trading mixed versus the other main currencies, lacking domestically generated directional bias. Political developments have seen UK Prime Minister Johnson strengthen his power, most notably with last week's resignation of Chancellor of the Exchequer Sajid Javid, who was replaced by Rishi Sunak, which effectively green lights a fiscally expansive policy to finance major infrastructure projects (details are due to be announced at the government's 2020-21 budget presentation in March). Available January data out of the UK have also confirmed a rebound in economic activity as the fog of political uncertainty cleared following the general election. On the negative side of the balance are persisting concerns about Brexit. The government has clearly signalled that it aims for divergence from the EU, and leave, without a new trading agreement if necessary, the Brexit transition at the end of the year.

[USD, CHF]
EUR-CHF has lifted modestly since printing a near-five-year-low at 1.0609 last week. The pronounced losses the cross has been seeing are partly a product of safe-haven demand for the franc, and partly as a lasting consequence of the surprising decision by the U.S. to add Switzerland to its list of currency manipulators last month. The U.S. 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 edged out a two-week low, at 1.3233, extending the correction from the four-month high seen a week ago at 1.3329. The pair has posted lower lows in four of the five trading days since the high was seen, which has been concurrent with a near 4% rebound in oil prices. Note that both the U.S. and Canadian markets are closed today.