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By XE Market Analysis December 23, 2019 4:15 am
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    XE Market Analysis: Europe - Dec 23, 2019

    The Australians and New Zealand dollars have edged higher in quiet, low volume trading. Both AUD-USD and NZD-USD printed a 10-day highs, at 0.6914 and 0.6614, respectively. Both pairings look set to enter 2020 near their recent five- and four-month highs. Anticipation of the U.S.-China trade deal and recent data showing a steadying in global growth following a recent soft patch have been benefiting the antipodean commodity currencies. President Trump said over the weekend that the U.S. and China would "very shortly" be signing off on the phase-1 trade deal, while Beijing stated earlier China that it will be lowering tariffs on a range of products, from pork and avocado, to some types of semiconductors. Elsewhere, narrow ranges have prevailed. EUR-USD has held in a tight rate below 1.1100, consolidating after dropping the upper 1.1100s over the last week. USD-JPY has continued to trade on a 109.0 handle, below the seven-month high that was seen in early December at 109.72. Sterling has settled after last week seeing its biggest weekly loss against the dollar in just over two years. Cable nudged just above 1.3000 after closing out last Friday at 1.2978-80, which was the lowest close seen since late November. A big year looms for the UK, with Brexit set to happen on January 31, and with the rubber to finally hit the road as the government starts trade negotiations with the EU and other nations and trading blocs. Replacing the EU, and the 40 trade deals the EU has with some 70 other economies and trading areas, will be a tall order, and will likely take many years to replicate.

    [EUR, USD]
    EUR-USD has continued to ply narrow ranges below the eight-month high seen in the immediate wake of the UK election last week, at 1.1199. EUR-JPY and EUR-CHF have traded lower after seeing respective a six-month and six-week highs. EUR-USD has been trending lower since early 2018, dropping from levels near 1.2500 and posting a 32-month low at 1.0879 in earlier October, the current nadir of the trend. The pair has since settled in a range marked by 1.0981 and 1.1179. The pricing out of further Fed tightening, after the central bank hiked rates three times, has taken the wind out of the sails of the dollar. The pair will enter 2020 without strong directional impulse. The U.S. economy has been holding up, while the Eurozone economy has stabilized following a soft patch.

    [USD, JPY]
    USD-JPY has remained in a directionally constrained stasis in the lower 109.0s. The pair is consolidating below the seven-month high at 109.72, seen in early December, which is the culmination of a rally from the late-August low at 104.45, a three-year low. Rallying global equity markets and a pricing out of Fed easing expectations have been keeping USD-JPY buoyant. The main U.S. equity indices last week hit fresh record highs. European and Asian markets, along with other global markets, have also remained buoyant, near trend highs. Anticipation of the U.S.-China trade deal and recent data showing a steadying in global growth following a recent soft patch have been maintaining a risk-on sentiment in global markets. We retain a bullish view 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]
    Sterling has settled after last week seeing its biggest weekly loss against the dollar in just over two years. Cable nudged just above 1.3000 after closing out last Friday at 1.2978-80, which was the lowest close seen since late November. A big year looms for the UK, with Brexit set to happen on January 31, and with the rubber to finally hit the road as the government starts trade negotiations with the EU and other nations and trading blocs. Replacing the EU, and the 40 trade deals the EU has with some 70 other economies and trading areas, will be a tall order, and will likely take many years to replicate. Prime minister Johnson last week managed to modify the EU withdrawal bill in such a way as to legally oblige the UK to leave the post-Brexit transition period (which leaves the UK in the EU's single market and customs union) at the end of 2020. This will leave just 11 months for the UK and EU to negotiate a trade deal, which many trade experts doubt is possible, even though a deal between the two should be able to be navigated much quicker than the trade deals the EU has made with third countries (given that the UK and EU are starting with 100% commonality). We are of the view that Johnson is bluffing with regard the no-deal Brexit threat, although it's an important political gesture so soon after the election. Ultimately we think the government will opt for a close relationship and close regulatory alignment with the EU for the reason that size and proximity matter when it comes to trade, especially as this would best preserve London as a the world's biggest financial centre. This would no doubt cause disgruntlement among the harder core Brexit advocates in the Conservative party, but the politics for a more pragmatic approach is likely to work in Johnson's favour in this parliament.

    [USD, CHF]
    EUR-CHF has settled in the upper 1.08s after yesterday posting a new one-month low at 1.0867, which is the culmination of quite a sharp drop from the seven-week peak of December 13, at 1.1033. The high was seen on news of the strong election victory of the Conservative Party at the UK's election, though the euro, tracking sterling, came back under pressure after UK PM Johnson last week implied that the no-deal threat was still an option.

    [USD, CAD]
    USD-CAD has found a footing after a near three-week phase of decline from levels above 1.3300. The pair on Friday printed a rebound-high at 1.3181, though this wasn't enough to prevent a fourth consecutive down week being logged. The Canadian dollar has over the last month been 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 this month also weighed on USD-CAD. Another supportive factor for the Canadian currency is higher oil prices, which up be over 10% from the lows seen in late November. USD-CAD looks likely to continue to trade with a downside bias.

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