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By XE Market Analysis December 6, 2019 3:49 am
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    XE Market Analysis: Europe - Dec 06, 2019

    The yen has nudged modestly higher despite gains in Asian stock markets. USD-JPY printed a two-day low at 108.65. The Japanese currency also saw a two-day low versus the Canadian dollar, but remained above respective Thursday lows against the euro, sterling and other currencies in overall non-committal markets into the release of the November U.S. employment report and as uncertainty about the U.S.-China trade situation lingers, although President Trump assured that things are "moving right along." Elsewhere, EUR-USD eked out a two-day high at 1.1109, remaining underpinned after some disappointing data out of the U.S. this week, though most other dollar dollar majors remained comfortably within their respective ranges form yesterday. One exception was NZD-USD, which rallied for a fifth consecutive day, posting a fresh four-month peak, at 0.6563. The AUD-NZD cross, which has dived by over 5% in less than four weeks amid an unusual decoupling in RBA versus RBNZ policy expectations, came with a couple of pips of the four-month low seen yesterday. Sterling settled after rallying to seven- and 31-month highs yesterday against the dollar and euro, respectively.

    [EUR, USD]
    EUR-USD eked out a two-day high at 1.1109, remaining underpinned after some disappointing data out of the U.S. this week, though most other dollar dollar majors remained comfortably within their respective ranges form yesterday. However, data out of the Eurozone hasn't been great, including today's German production report for October, which showed a sub-forecast 1.7% m/m decline. Focus now falls squarely on today's release of the US. November employment report. We expect the nonfarm payrolls headline to rise 190k versus the 128k seen in October. Hourly earnings are seen rising 0.3% from 0.2% previously, while the unemployment rate is expected steady at 3.6%. We won't say it's a crucial release as the FOMC is firmly on hold for now. But, it will be important for what it suggests on the economy. Expectations are on the fence and the data could tips outlooks one way or another -- toward increased optimism on growth, or toward a more sluggish view.

    [USD, JPY]
    The yen has nudged modestly higher despite gains in Asian stock markets. USD-JPY printed a two-day low at 108.65. The Japanese currency also saw a two-day low versus the Canadian dollar, but remained above respective Thursday lows against the euro, sterling and other currencies in overall non-committal markets into the release of the November U.S. employment report and as uncertainty about the U.S.-China trade situation lingers. 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, as this would be a backdrop that would maintain Japan's yield-hungry investors confidence in foreign investments.

    [GBP, USD]
    Sterling has settle today after running higher for most of this week as markets unwound the currency's Brexit discount at a pace. Cable topped out at a seven-month high yesterday at 1.3166, while EUR-GBP printed a 31-month low. With less than a week to go until the UK's general election, it's looking increasingly unlikely that Labour will close the popularity gap with PM Johnson's Conservative party. Politico's poll track has the Conservatives with 43% support, unchanged from Monday, and Labour with 33% support, also unchanged from Monday. The gap is seen as being beyond the margins of error in polling methodology, and sufficient to return Johnson as prime minister with a working majority. The pound in the BoE's real trade-weighted measure remains 8% down on levels prevailing ahead of the vote to leave the EU in June 2016, having rallied by just over 9% from the multi-decade low that was seen in mid August. Assuming the Conservatives win and return to the House of Commons with a working majority, the Brexit deal will almost certainly be ratified and Brexit will be delivered in January. The UK would then enter a one-year transition period, which would likely be extended for up to two years beyond that (we would expect the Tories to renege on its manifesto pledge not to seek an extension), to allow time for a trade deal to be negotiated between the UK and EU (negotiations to date have focused on divorcing terms). During this period, not much will change in practical terms, with the UK remaining in the EU's single market and customs union. While the pound, in this scenario, will likely remain bid, there are reasons not to be get too bullish on the UK currency, one being the risks of the UK devolving, and another being realities of trying to strike trade deals in a more protectionist world.

    [USD, CHF]
    EUR-CHF has continued a run of relatively choppy trading, dropping back to the mid 1.0900s in the latest phase, which has swung the three-week low seen earlier in the week at 1.0921 back into the scopes. The low was the culmination of a three-day drop from the one-month high seen last week at 1.1027. The cross has been correlating with the ebb and flow of global stock markets, with the franc retaining a function as a safe haven currency despite the -0.75% deposit rate in Switzerland.

    [USD, CAD]
    USD-CAD has steadied after diving from 1.3320 (Tuesday's high) to a 1.3158 (yesterday's lows). The later level is a one-month low. A 6%-odd rally in oil prices this week has underpinned the Canadian dollar. The drop in USD-CAD this week took out the 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. The pairing is continuing to trade near 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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