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By XE Market Analysis December 3, 2019 4:44 am
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    XE Market Analysis: Europe - Dec 03, 2019

    The dollar has consolidated losses seen yesterday following the unexpected four-consecutive month of contraction in the November ISM manufacturing report out of the U.S. A side theme has been Australian dollar outperformance, while most of the other main currencies have traded neutrally so far today. Asia equities went negative, following Wall Street's dive, though indices have pared losses or rallied back into the black losses during afternoon trading. China's CSI 300, for instance finished with a 0.4% gain after showing a 0.6% loss at the intraday low. European and U.S. index futures are showing moderate gains too, pointing to opening gains on European bourses and on Wall Street. Australia's ASX index, however, saw its worst day in two months with a 2.2% decline. Aussie shares underperformed for the same reason as the Aussie dollar outperformed, with the RBA's post-meeting statement from Governor Lowe being a tad less dovish than had been generally anticipated, noting that the economy had reached a "gentle turning point" while maintaining the bank's view that growth will rise to about a 3% growth clip by 2021. This followed the widely anticipated decision to leave the cash rate at the record low of 0.75%. Australian money markets had been discounting just over 50% odds for a 25 bp rate cut at the February policy meeting. AUD-USD rallied to a three-week high at 0.6849. AUD-JPY also sprinted to three-week highs, while AUD-NZD is set to post its first up day in two weeks. One thing to note, and that is Lowe's statement implicitly implies a benign assessment about the impact of U.S.-China trade warring (which the Australian economy is particularly exposed to), a view which perhaps looks a little incongruous given how things have been going. It's now nearly two months since the limited "phase 1" deal was announced, and the U.S. is on December 15 set to raise tariffs on a further $160 bln of Chinese imports.

    [EUR, USD]
    EUR-USD rotated higher on the back of dollar declines following an unexpected contraction in the U.S. November manufacturing ISM report. The 10-year U.S. T-note yield spread over the Bund shrivelled by about 7 bp, and EUR-USD duly turned higher on the back of this. The data puts a chink in arguments that the U.S. economy has been basing following a soft patch. Markets will be watching incoming data closely, including vehicle sales, the service ISM and employment figures to get a better handle on where the economy is at and is headed. For now, the dollar is likely to consolidate losses and retain a bias to weaken. How the U.S.-China trade, technology and security dispute unravels, and what impact it has on the U.S. economy, remains a wildcard risk. It's now nearly two months since the limited "phase one" deal was announced, and Washington is due on December 15 to hike tariffs on a further $160 bln of Chinese imports. The trade ware has been dragging on for a year and a half, and so far the dollar has performed well, even providing as a safe haven during times of consequential risk aversion in global markets as the U.S. economy has been holding up relatively well, and given the allure of safe-haven, and positively yielding, U.S. Treasuries. The dollar won't fare so well if the U.S. economy is contracting or underperforming other major economies. Amid all this, was an FT report suggesting that the Fed is looking to allow inflation to overshoot, if necessary. Perhaps President Trump's dreams for a weaker dollar are being answered. Taking a step back, EUR-USD has been chopping around 1.1050 since early August, ranging from 1.0879 to 1.1179 over this period. The low marked a two-and-a-half year trough, the culmination of a bear trend that's been unfolding since early 2018, from levels around 1.2500. Momentum of this trend waned as the Fed cut interest rates three times from late July, though markets have pared back future easing expectations over the last month.

    [USD, JPY]
    USD-JPY dove yesterday from a six-month high at 109.72 to a one-week low at 108.92, subsequently settling around the 109.00 mark. The losses were prompted by a miss in the U.S. manufacturing ISM report for November. Asia equities went negative, following Wall Street's dive, though indices have pared losses or rallied back into the black losses during afternoon trading. China's CSI 300, for instance finished with a 0.4% gain after showing a 0.6% loss at the intraday low. This backdrop likely deterred fresh yen buying. The principal directional driver of the yen will likely to remain the ebb and flow of risk appetite in global markets. This will keep developments on the U.S.-Chine trade front will be front and centre. Assuming the phase-1 deal comes (eventually) to fruition, and with the U.S. economy enjoying what looks like a goldilocks economy -- growth slower, but still holding comfortably in positive expansion with inflation remaining benign -- then more upside would likely be seen in USD-JPY. In Japan, "Abenomics" has been getting a dusting down. Japanese PM Abe earlier in the month pledging a renewed push of fiscal stimulus, while BoJ Governor Kuroda said last week that there is "ample room" for more easing, though fresh stimulus was being considered at the currency juncture.

    [GBP, USD]
    Cable posted a six-week high at 1.2988, extending the dollar-drive gains of yesterday with a bout of general pound gains since the London open today. With just nine days to go until the election, it's looking less likely that Labour will be able to close the polling gap with the Conservative party. Politicos poll tracker is showing the Conservative party with 43% support, unchanged from Friday, and Labour with 33%, up two points from Friday. There looks to be a late tick higher in support for Labour, but no sign of a surge in support, and it continues to look likely that PM Johnson's Tories will be returned to parliament with a working majority. This said, there is an air of unpredictability about this election. For one, there is a large proportion of undecided voters, of between 16% and 26% based on polls from YouGov, Survation an Opinium over the last week. Studies cited by Reuters suggested that the percentage of floating voters could be as high as 50%, though we would question the plausibility of this given the dominance of Brexit as an issue. PM Johnson's Tories is the only choice for Brexit supporters that is guaranteeing departure from the EU (given that UKIP is now an non-entity and that the Brexit party isn't contesting Tory-held seats). Any outcome in the election other than a Tory majority would almost certainly lead to a second referendum on EU membership. This will galvanise Brexit supporters.

    [USD, CHF]
    EUR-CHF has dropped back toward the mid 1.0900s after posting a one-month high at 1.1027 yesterday. The decline is notable because: 1, it has been concurrent with a rise in EUR-USD, and; 2, is has been concurrent with a bout of risk aversion in global markets, evidencing that the franc retains a degree of desirability as a safe haven currency despite the SNB's punishing -0.75% discount rate.

    [USD, CAD]
    USD-CAD has traded back to the south side of 1.3300 after the latest in a series of failed attempts over the last couple of weeks to sustain gains above here. Sub-forecast U.S. manufacturing data yesterday has seen the U.S. yield advantage over Canadian yields contract, which has weighed on the USD-CAD pairing. USD-CAD has remained above the two-week low seen at 1.3254 on November 22, which was set after BoC Governor Poloz stated that interest rates are "about right," which was taken as a partial walk-back of recent dovish signalling from the central bank. At prevailing levels, USD-CAD is trading near to the midway point of a broadly, at times choppy, sideways range that's been seen since July 2018. More of the same looks likely.

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