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By XE Market Analysis December 30, 2019 3:55 am
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    XE Market Analysis: Europe - Dec 30, 2019

    The dollar has continued to trade softer in thin markets. The narrow trade-weighted USD index (DXY) ebbed to a 17-day low at 96.73. The index has racked up a near 1% loss over the last week, which has come as global stock markets rallied to fresh major-trend highs, or record highs in the case of the three principal indices in the U.S. The move has been concomitant with a decline in U.S. yields, which has suppressed the U.S. yield advantage over the Bund by about 5 bps in the case of the 10-year yield differential. EUR-USD earlier traded above 1.1200 for the first time since mid August, posting a high at 1.1210. This extends the moderate recovery the pair has seen after printing a 32-month low in early October. A pricing out of Fed tightening, after the U.S. central bank hiked rates three times earlier in the year, has been weighing on the U.S. currency, along with the thawing in U.S.-China trade relations and the resolution of Brexit, which has seen the dollar's safe-haven premium unwind. USD-JPY posted an 18-month low at 109.06, putting in some distance from the seven-month peak that was seen in early December, at 109.72. Cable edged out an 11-day high at 1.3125 on the back of dollar weakness, with the pound trading more indifferently against other currencies. AUD-USD hit a five-month high at 0.6999 in what is now the pair's fifth consecutive up week. NZD-USD also printed a five-month high. The antipodean currencies have been correlating with the progress of U.S.-China trade talks. The Canadian dollar, meanwhile, the other dollar bloc member, posted a two-month high against the U.S. buck. The low USD-CAD is 1.3063. A three-month high in oil prices has underpinned the Canadian currency. Data showing drawdowns in U.S. crude reserves and tensions in the Mideast have been underpinning oil prices.

    [EUR, USD]
    EUR-USD earlier traded above 1.1200 for the first time since mid August, posting a high at 1.1210. This extends the moderate recovery the pair has seen after printing a 32-month low in early October. A pricing out of Fed tightening, after the U.S. central bank hiked rates three times earlier in the year, has been weighing on the U.S. currency, along with the thawing in U.S.-China trade relations and the resolution of Brexit, which has seen the dollar's safe-haven premium unwind. 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 early October, the current nadir of the trend.

    [USD, JPY]
    USD-JPY posted an 18-month low at 109.06, putting in some distance from the seven-month peak that was seen in early December, at 109.72. The high had been the culmination of a rally from the late-August low at 104.45, a three-year low. Rallying global equity markets has been keeping USD-JPY buoyant. 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]
    The pound in trade-weighted terms remains down by about 8-9% from levels prevailing ahead of the vote to leave the EU in 2016. Brexit will now happen at the end of January, and the UK will enter a 11-month transition period before leaving the EU outright at the end of 2020. Most trade experts think this is too sort a time frame for a new trading deal between the UK and EU to be achieved, let alone establish global trade deals. We anticipate that the Breixt rubber hitting the road will curtail the pound's upside potential in 2020.

    [USD, CHF]
    EUR-CHF has settled near 1.0900 after last week 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 implied that the no-deal threat was still an option.

    [USD, CAD]
    The Canadian dollar posted a two-month high against the U.S. buck. The low USD-CAD is 1.3063. A three-month high in oil prices has underpinned the Canadian currency. Data showing drawdowns in U.S. crude reserves and tensions in the Mideast have been underpinning oil prices.

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