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By XE Market Analysis December 4, 2019 3:45 am
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    XE Market Analysis: Europe - Dec 04, 2019

    The yen has rallied on a safe-haven bid as global stock markets turn lower after President Trump, nearly two months after announcing the limited "phase 1" trade deal with China, said that trade negotiations may be postponed until after the 2020 presidential election. This after announcing intentions to tariff steel imports from Brazil and Argentina. Disappointing Q3 GDP out of Australia, a country that its highly exposed to the U.S.-China trade, was also in the mix. Growth came in at 0.4% q/q in the antipodean economy, against a median of 0.5%. USD-JPY printed a 13-day low at 108.43, while EUR-JPY and AUD-JPY descended into respective one-week low territory. The Australian dollar has been the day's biggest loser out of the main currencies. AUD-USD more than reversed gains seen yesterday on the less dovish than expected RBA statement, in making a low of 0.6814. The dollar, outside the case of USD-JPY, has held firm, finding its own safe haven bid. The sharpest in six months drop in the U.S. 10-year T-note yield yesterday was a reflection of this safe haven bid, which is why forex markets haven't been trading on yield differential dynamics in the latest phase. Both EUR-USD and Cable have drifted moderately lower so far today, down from the respective two- and six-week highs that were seen yesterday, at 1.1093 and 1.3011. Elsewhere, EUR-CHF has dropped for a third consecutive trading day, this time hitting a three-week low at 1.0923. The decline in the cross have correlated with the prevailing risk-off phase that started at Friday's release of disappointing U.S. manufacturing ISM data.

    [EUR, USD]
    EUR-USD has drifted moderately lower from the two-week high seen yesterday at 1.1093. A safe-haven bid for dollars has put a cap on the pairing after President Trump, nearly two months after announcing the limited "phase 1" trade deal with China, said that trade negotiations may be postponed until after the 2020 presidential election. This after announcing intentions to tariff steel imports from Brazil and Argentina. The utilization of the dollar as a haven has offset a continued narrowing in the U.S. Treasury versus Bund yield advantage. The 10-year U.S. T-note yield spread over the 10-year Bund yield yesterday shrank to its lowest since January 2018, at 206.8 bps. How the U.S.-China trade dispute unravels, and what impact it has on the U.S. economy, remains a wildcard. 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. 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. The Eurozone economy, meanwhile, has shown signs of steadying following recent manufacturing-led weakness, though remains fragile and it remains difficult to construct a convincing medium- to-longer term bullish argument for the euro. Final November services PMI for the Eurozone will be of interest today.

    [USD, JPY]
    The yen has rallied on a safe-haven bid as global stock markets turn lower after President Trump, nearly two months after announcing the limited "phase 1" trade deal with China, said that trade negotiations may be postponed until after the 2020 presidential election. This after announcing intentions to tariff steel imports from Brazil and Argentina. Disappointing Q3 GDP out of Australia, a country that its highly exposed to the U.S.-China trade, was also in the mix. Growth came in at 0.4% q/q in the antipodean economy, against a median of 0.5%. USD-JPY printed a 13-day low at 108.43, while EUR-JPY and AUD-JPY descended into respective one-week low territory. 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]
    The pound was registering modest gains against the dollar and euro, and even the yen, from early Monday levels, as of early trading in London today. Cable yesterday posted a six-week high at 1.3011, which is just 1 pip shy of the six-month high seen on October 22, and EUR-GBP has edged below 0.8500 for the first time since May. With just eight days to go until the UK's general 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, and Labour with 33%, both unchanged over the last day. While there looks to have been a late tick higher in support for Labour, there is 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, though anti-Brexit tactical voting is a wildcard risk to Johnson.

    [USD, CHF]
    EUR-CHF has dropped for a third consecutive trading day, this time hitting a three-week low at 1.0923. The decline in the cross have correlated with the prevailing risk-off phase that started at Friday's release of disappointing U.S. manufacturing ISM data.

    [USD, CAD]
    USD-CAD has been oscillating around the 1.3300 level for two weeks now. Last Friday's sub-forecast U.S. manufacturing has seen the U.S. yield advantage over Canadian yields narrow, which has kept USD-CAD's upside in check. The has in the meanwhile 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. Oil prices, although modestly firmer, are still showing about a 3% decline from week-ago levels. Overall, a mixed pool of influencers on USD-CAD. The pairing 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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