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By XE Market Analysis December 16, 2019 3:34 am
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    XE Market Analysis: Europe - Dec 16, 2019

    The dollar majors have been seeing typically narrow early-week ranges in quite year-end-approaching conditions. The narrow trade-weighted USD index (DXY), at 96.97, was showing a 0.2% decline heading into the London interbank open, correcting about half the gain seen on Friday. The index has been trending lower over the last two weeks, producing a five-and-a-half-month low last Thursday, at 96.59. The decline came amid a backdrop of rallying global stock markets, and associated gains in the Canadian dollar and other commodity currencies, along with advances in sterling and the euro, as risks for a disorderly Brexit scenario evaporated. The optimism of this period proved to be justified, with the phase-1 trade deal between the U.S. and China having been "totally done" (in the words of U.S. Trade Representative Lighthizer), and with UK prime minister Johnson having gained a strong mandate to implement his Brexit deal with the EU after his Conservative Party won a commanding majority at the UK's election last week. This should leave markets to establish the dollar at softer levels versus most currencies. The week ahead is packed with data releases, and the BoE and BoJ are meeting on policy this week, where both are expected to leave prevailing rates and settings unchanged. Several Asian central banks, other than the BoJ meet this week, and all are expected to leave policy unchanged. U.S. data releases should endorse the Fed's decision to pause on policy after trimming rates three times this year. Focus will be on New Zealand data following strong New Zealand dollar outperformance since early November after the RBNZ shifted gears. Australian employment data will also be a highlight. Preliminary December PMI data will be the prime focus in Europe, where we expect slightly firmer headline readings out of both the Eurozone and the UK.

    [EUR, USD]
    The euro, outside the case against the pound, has rallied, being positively influence the UK election result, which heralds the end of Brexit uncertainty. EUR-USD on Friday posted a four-month high at 1.1199, while EUR-JPY saw a six-month peak and EUR-CHF a six-week high.

    [USD, JPY]
    The yen has traded lower over the last week as global stocks rallied on news that the U.S. and China have reached agreement on the "phase-1" trade deal. USD-JPY posted a two-week high at 109.70, and came within 6 pips of the early-December seven-month high. We are bullish of USD-JPY. The U.S. is enjoying what looks like a goldilocks economy -- growth slower, but still holding comfortably in positive expansion with inflation remaining benign, while the risk-on vibe in global markets should maintain Japan's yield-hungry investors' confidence in foreign investments.

    [GBP, USD]
    The pound has settled after rallying strongly on news of the UK election result late last week. There are seven key takeaways that we are now factoring with regard to the UK's election: 1, the size of the Conservative's majority has diluted and weakened the group of right-wing hardcore Brexiteers in the party; 2, Johnson will lead the nation from an inclusive "one nation" centre-right position, 3, Brexit will be legally implemented by the end of January under the terms of the divorcing deal on the table; 4, Johnson, in our view, will look to extend the transition period, during which time the UK will remain in the EU's single market and customs union, for two years beyond the end of 2020 (despite manifesto promises to the contrary); 5, Scotland will push hard for a new referendum on independence, and nationalist arguments in Northern Ireland for unification with the Republic of Ireland (where there is now a greater representation of nationalist MPs than unionist MPS for the first time in history) will gather momentum. 6, there will, at some point, be a rubber-hitting-the-road moment when the reality of trying to replicate the trade deals that the UK had with the world's biggest free trade area, along with the 40 trade agreements the EU has with 70 countries, becomes apparent. The broad trade-weighted measure of sterling has rallied by nearly 11% from the historic lows of August, though remains down by 6-7% from levels prevailing ahead of the vote to leave the EU in June 2016. We don't anticipate this discount being fully unwound over the months ahead.

    [USD, CHF]
    EUR-CHF has settled lower after spiking on Friday to a six-week peak of 1.1033 on news of the strong election victory of the Conservative Party at the UK's election. This heralds the end of a protracted period of Brexit related uncertainty, which had been casting a pall over both the UK and European economies. The euro also posted gains against the dollar and yen, and most other currencies, with the main exception being the case against the pound.

    [USD, CAD]
    USD-CAD has printed a fresh six-week low, at 1.3135, making this the fourth consecutive week of declines. The Canadian dollar and its dollar-bloc brethren benefiting from positive developments on both the USMCA and U.S.-China trade fronts. The Fed's removing a forecast for a 25 bps hike in 2020 at its FOMC policy meeting last week also weighed on USD-CAD. Another supportive factor for the Canadian currency is higher oil prices, which are showing a near 9% gain from the lows seen in late November. Assuming there are no upsets on the trade front, USD-CAD looks likely to continued to trade with a downside bias.

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