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By XE Market Analysis December 5, 2018 3:47 am
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    XE Market Analysis: Europe - Dec 05, 2018

    The Dollar has traded firmer despite fresh declines in U.S. yields yesterday, where the flattening yield curve has added the list of possible precursors of recession. Safe haven demand for the U.S. currency was cited in market narratives yesterday as Wall Street headed to sharp closing losses. There is also a holiday in the U.S. today, which has thinned markets already somewhat. EUR-USD has printed a two-day low at 1.1317, which is just over a big figure down on yesterday's peak. Despite the risk-on vibe, USD-JPY and most Yen crosses have traded firmer, rebounding from lows seen during the New York PM session yesterday. Stock markets in Asia have again declined, though by a relatively limited extent compared to yesterday, while S&P 500 futures are showing 0.4% gain in the overnight session after the cash index closed on Wall Street with a hefty 3.2% loss yesterday. USD-JPY lifted to a high of 113.09, up from yesterday's two-week low at 112.57. EUR-JPY and other Yen crosses have also lifted. One exception has been AUD-JPY, which sank to five-session lows amid Australian Dollar underperformance following a big miss in Australian Q3 GDP data, which came in with growth of 0.3% q/q, half the median forecast had been. AUD-USD shed over 0.5% in posting a six-day low at 0.7281.

    [EUR, USD]
    EUR-USD has printed a two-day low at 1.1317, which is just over a big figure down on yesterday's peak. The move has been driven by a broad firming in the Dollar, despite fresh declines in U.S. yields yesterday, where the flattening yield curve has added the list of possible precursors of recession. Safe haven demand for the U.S. currency was cited in market narratives yesterday as Wall Street headed to sharp closing losses. There is also a holiday in the U.S. today, which thinned markets somewhat and may have exacerbated the extent of market movements. While U.S. yields have been falling, which undermines one plank of Dollar support, yields have also been tumbling in the Eurozone. In the Eurozone, the Eurosceptic populist movement gripping parts of the Eurozone (the Eurogroup yesterday backed the Commission's assessment that Italy is in serious breach of the bloc's fiscal rules) remains a concern for investors, along with softer inflation and signs of flagging growth momentum in the Eurozone economy. The final reading of the Eurozone's November manufacturing PMI, released earlier in the week, came in at 51.8, up from preliminary estimate of 51.5, but still down from 52.0 in October and the lowest reading since August 2016. EUR-USD has been in a bear trend since April, although downside momentum has abated in recent weeks concomitantly with the fading Fed's tightening cycle. EUR-USD has resistance at 1.1359-61, and support at 1.1305.

    [USD, JPY]
    USD-JPY and most Yen crosses have mostly traded firmer, rebounding from lows seen during the New York PM session yesterday. Stock markets in Asia have again declined, though by a relatively limited extent compared to yesterday, while S&P 500 futures are showing 0.4% gain in the overnight session after the cash index closed on Wall Street with a hefty 3.2% loss yesterday. USD-JPY lifted to a high of 113.09, up from yesterday's two-week low at 112.57. EUR-JPY and other Yen crosses have also lifted. One exception has been AUD-JPY, which sank to five-session lows amid Australian Dollar underperformance following a big miss in Australian Q3 GDP data, which came in with growth of 0.3% q/q, half the median forecast had been. There remain concerns about the U.S. and China being on different pages with regard to trade, despite some positive mood music from officials on both sides of the Pacific. Trump has demanded that he wants a "real deal" or none at all. We advise taking a sell-into-gains tack for USD-JPY, and AUD-JPY in particular, given the risk for a sustained period of risk aversion in global markets.

    [GBP, USD]
    Cable has settled near 1.2700 after printing a 17-month low at 1.2658 yesterday. The Pound is down by an average of 2.8% versus the Dollar, Euro and Yen from month-ago levels, and is maintaining what we estimate to be a 13-15% Brexit-related discount in trade-weighted terms relative to what would have been likely levels had the 2016 EU vote been in favour of remaining in the union. News that the EU's Advocate General said that the UK should be able to unilaterally revoke Article 50 and remain in the EU if it so desires sparked a 1 big figure rally in Cable yesterday, but the losses have since more than unravelled. The author of the Article 50 clause has always said that the UK would unilaterally be able to revoke it, while EU leaders have repeatedly stated that the door remains open for the UK to reverse the Brexit process, or re-join the EU at a later date. The major focus in the UK is on the House of Commons vote on the Brexit deal, next Tuesday. It still looks quite likely to be voted down, despite the best efforts of Prime Minister May and her allies to sell it. If it is voted down, and if PM May is taken down by a parliamentary no confidence vote, then a new general election will be on the cards. If May did survive a no confidence motion, then a second EU referendum would be likely. We advise a bearish trend-following strategy for Cable.

    [USD, CHF]
    EUR-CHF has been re-established back above 1.1300 after come choppy price action in recent sessions. The cross has support at 1.1296-98.

    [USD, CAD]
    USD-CAD has vaulted to a three-session high at 1.3292. A turn lower in oil prices (down over 1.5% at the time of writing) and a broad rebound in the U.S. Dollar have driven USD-CAD higher. The pair remains in a broadly sideways, although choppy, range that's been unfolding for two weeks now. A safe haven dynamic has been buoying the U.S. currency, despite lower Treasury yields amid an ongoing recalibration of Fed policy expectations, where markets are now discounting a pause in the cycle following a hike this month. The BoC meets on policy this Wednesday, where no change is widely anticipated. USD-CAD has support at 1.3160.

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