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By XE Market Analysis December 10, 2019 3:55 am
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    XE Market Analysis: Europe - Dec 10, 2019

    The New Zealand dollar posted a fresh four-month high versus the Australian dollar, while NZD-USD and NZD-JPY saw two-day highs. A shift in RBNZ policy expectations and an associated rise in NZ yields have been underpinning the kiwi. The 10-year U.S. T-note yield advantage relative to the NZ 10-year yield has narrowed by some 15 bps since late November. We expect this trend to taper out at some point, as RBNZ monetary policy is historically sensitive to movements in the currency. Elsewhere in the forex realm, most dollar pairings and associated cross rates have remain in narrow ranges, holding within respective Monday ranges in thinned-out year-end conditions. EUR-USD has remained particularly directionally challenged, seeing less than a 10-pip range during the Asia-Pacific session until the entry of the London interbank market. USD-JPY managed a 12-pip range. The stellar U.S. jobs report of last Friday has had little lasting impact on the dollar. Markets seem non-committal, partly due to seasonal considerations and partly amid a certain anxiety ahead of the weekend's deadline for the U.S. to hike tariffs on a further $160 bln worth of Chinese goods. A delay in this deadline is possible, if a phase-1 deal fails to come to fruition, while an implementation of the new tariffs would mark an escalation in the trade war and cause a significant risk-off response in illiquid year-end global markets. Sterling has settled after rallying yesterday. Markets have factored in a Conservative victory, with an outright majority, at Thursday's UK general election, based on public opinion polling, though political pundits have been stressing that undecided votes are making this election tricky to call. Polls have suggested most undecided voters are people who voted for Labour in 2017, suggesting there is possibility for an unexpectedly strong showing for Labour.

    [EUR, USD]
    EUR-USD has remained particularly directionally challenged, seeing less than a 10-pip range during the Asia-Pacific session until the entry of the London interbank market. Markets seem non-committal, partly due to seasonal considerations and partly amid a certain anxiety ahead of the weekend's deadline for the U.S. to hike tariffs on a further $160 bln worth of Chinese goods. A delay in this deadline is possible, if a phase-1 deal fails to come to fruition, while an implementation of the new tariffs would mark an escalation in the trade war and cause a significant risk-off response in illiquid year-end global markets (which would likely be bearish for EUR-USD).

    [USD, JPY]
    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 settled after rallying yesterday. Markets have factored in a Conservative victory, with an outright majority, at Thursday's UK general election, based on public opinion polling, though political pundits have been stressing that undecided votes are making this election tricky to call. Polls have suggested most undecided voters are people who voted for Labour in 2017, suggesting there is possibility for an unexpectedly strong showing for Labour. Regarding Brexit, any outcome in the election other than a Conservative with majority would put a second referendum on EU membership back on the table. The pound in the BoE's real trade-weighted measure remains about 7-8% down on levels prevailing ahead of the vote to leave the EU in June 2016, although rallying by over 9% from the multi-decade low that was seen in mid August. The recouperation reflects a pricing-out of risk for a no-deal Brexit.

    [USD, CHF]
    EUR-CHF ebbed to a six-day low at 1.0926, nearing the three-week low seen last Wednesday at 1.0921. The cross to a degree 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 consolidated below 1.3250 after surging by about a big figure last Friday to a 1.3270 peak following the strong U.S. jobs report. A rise in the U.S. yield advantage over Canadian yields has underpinned the pairing, offsetting the near 6% week-on-week rise in oil prices. Taking a step back, 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. The USMCA, formally known as NAFTA, will be in focus as senior representatives from all three countries will be meeting in Mexico City today to try and progress negotiations. Negotiations for USMCA have been ongoing since August 2017, with many false dawns regarding a final agreement being made. Policymakers are once again saying they are close to a deal. Once a deal is finalised, all three countries will then have to ratify it.

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