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By XE Market Analysis November 11, 2019 12:11 pm
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    XE Market Analysis: Asia - Nov 11, 2019

    The dollar weakened on Monday, while the pound and yen outperformed on Brexit related news and on a sage-haven bid, respectively. The Australian dollar was also among the day's underperformers. Wall Street corrected after posting record highs on Friday, and most equity markets across the world turned lower. President Trump said on Saturday that the U.S. would only make a deal with China if it was right for America while saying that reporting about U.S. willingness to lift tariffs had been exaggerated by the media. Data also showed Chinese producer prices contracting at their fastest pace in over three years in October, reflecting weakness in the manufacturing sector, while protests in Hong Kong flared up anew. USD-JPY and most yen crosses dropped below their respective Friday lows as the Japanese currency picked up a safe-haven bid. USD-JPY posted a low at 108.80 while EUR-JPY fell to a 26-day nadir at 120.07. Dollar weakness lifted EUR-USD toward 1.1050, putting in a little space from the one-month low seen on Friday at 1.1016. AUD-USD remained heavy after posting a two-week low on Friday at 0.6847. The pound vaulted higher on Brexit related news, and was showing a near 1% gain on the dollar at its highs while hitting six-month highs in the case against the euro. The catalyst was the Brexit Party deciding not to contest PM Johnson's Conservative Party in the 317 seats they won at the previous general election, a move that will greatly reduce the risk of splitting the pro-Brexit vote at the December-12 election. Ahead, recent strength in global equity valuations will continue to be tested, with gains or losses hinging on U.S.-China trade developments. Fundamentals will be back in view with key data on growth and inflation from around the world on tap. The UK released prelim Q3 GDP today, and it was a miss, coming in at a near 10-year low with just 1.0% y/y growth.

    [EUR, USD]
    EUR-USD has been amid a bear trend that's been unfolding since early 2018, from levels around 1.2500. The trend has coincided with the 10-year T-note versus 10-year Bund yield differential having narrowed from 278 bps to the current 218 bps. We expect the trend to persist.

    [USD, JPY]
    The biggest directional driver of the yen is likely to remain the ebb and flow of risk appetite in global markets (there is causation behind this correlation), and so developments on the U.S.-Chine trade front will be front and centre. Assuming the "phase 1" deal comes to fruition, and with the U.S. economy enjoying what looks like a goldilocks economy -- growth slower, but still holding up, and inflation remaining benign -- then more upside will likely be seen in USD-JPY. In Japan, "Abenomics" has been getting a dusting down. Japanese PM Abe last week pledged a renewed push of fiscal stimulus, while BoJ Governor Kuroda had earlier in the week reaffirmed the central bank's commitment to monetary easing to achieve its 2% inflation target, though he admitted "it's taking time." Regarding Japan's disinflation quagmire, there is a theory that QE, or QQE with yield curve control in Japan's case, is backfiring in the sense that it fosters excess capacity, thereby generating deflationary forces.

    [GBP, USD]
    The pound vaulted higher on Brexit related news, and was showing a near 1% gain on the dollar at the highs while hitting six-month highs in the case against the euro. The catalyst was the Brexit Party deciding not to contest PM Johnson's Conservative Party in the 317 seats they won at the previous general election in 2017. This will greatly reduce the risk of splitting the pro-Brexit vote at the December-12 election. The Brexit Party will instead contend seats held by the Labour party and other pro-EU parties. This is a climbdown for Nigel Farage, the leader of the Brexit Party, who has been been critical of the deal Boris Johnson's reached with the EU, which he thinks will result in the UK being too aligned with EU rules and regulations. Farage's decision came with opinion polls trending in favour of the Conservative Party and away from the Brexit Party since the election was announced. Politico's poll tracker shows the Conservatives now command 39% support, up 3 points over the last two weeks and up from 28% at the time Johnson took over from Teresa May in late July. With the Brexit Party having backed down, the Conservatives are likely to see their lead strengthen, and as things look now, the Conservatives are well positioned to win the election and return to Parliament with a majority. That in turn implies Brexit being implemented in January. The main threat to Johnson is a possible coalition between Labour and the LibDems, which have a combined support tally of 44%. Tactical pacts between smaller pro-EU parties will also be aiming to counter the pro-Brexit vote.

    [USD, CHF]
    EUR-CHF has seen some choppy trading in recent sessions, but with an overall downside bias, despite the abatement in no-deal Brexit risk and the recent blast of risk-on positioning in global markets.

    [USD, CAD]
    USD-CAD is likely to remain buoyant following the disappointing October jobs report out of Canada and with investors harbouring concerns about whether U.S.-China can even reach an agreement on the partial "phase 1" deal. The pairing hit a four-week peak at 1.3236 on Friday and has since remained underpinned. USD-CAD had earlier last week printed a one-week low at 1.3015 before rebounding. Taking a couple of steps back, the pair is near to the midpoint of the range that's been seen over the last four-plus years, and there presently doesn't look to be much potential for this pattern to break.

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