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By XE Market Analysis December 31, 2019 3:57 am
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    XE Market Analysis: Europe - Dec 31, 2019

    The yen, other Asian currencies, and dollar block units have rallied following above-forecast manufacturing PMI data out of China. USD-JPY fell to an 18-day low at 108.62. The Singapore dollar printed an eight-month high versus the dollar, and the Malaysia Ringgit a six-and-a-half-year high. AUD-USD posted a fresh one-month peak at 0.7012, in what is now the pair's fifth consecutive up week, and NZD-USD also made a new five-month peak, with the pair amid its sixth straight up week. USD-CAD fell to a fresh five-month low, at 1.3044, in what is now sixth consecutive down week the pairing has seen. China's official manufacturing PMI for December came in at 50.2, a tad up on the median forecast for 50.1, and unchanged from the month prior. This offset a slight miss in the services PMI (and with the Chinese service-sector performance being off lesser interest to markets than the performance's of the dominant manufacturing sector). Of note was the first above-50.0 reading in manufacturing new export orders for the first time in 18 months -- i.e. the duration of the trade war with the U.S. With the U.S. and China expected to sign-off on their phase-1 trade deal in the coming weeks, the data was tonic, at least for currencies, with stock markets sputtering after recent strong gains. Elsewhere, EUR-USD has been trading on either side of 1.1200 since making a four-month high yesterday at 1.1220. Cable also remained below the high seen yesterday. The UK's Telegraph newspaper cited Phil Hogan, the new EU trade commissioner, predicting that prime minister Johnson will renege on his self-imposed legal commitment to exit the Brexit transition period by the end of 2020. Hogan drew attention to Johnson's high profile pledge to "die in a ditch" rather than let Brexit be extended beyond October. We concur with this view.

    [EUR, USD]
    EUR-USD has been trading on either side of 1.1200 since making a four-month high yesterday at 1.1220. 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. Markets are presently discounting nearly 50% odds for the Fed to cut rates by 25 bps or more by the 2020 December FOMC. 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]
    The yen, other Asian currencies, and dollar block units have rallied following above-forecast manufacturing PMI data out of China. USD-JPY fell to an 18-day low at 108.62. China's official manufacturing PMI for December came in at 50.2, a tad up on the median forecast for 50.1, and unchanged from the month prior. This offset a slight miss in the services PMI (and with the Chinese service-sector performance being off lesser interest to markets than the performance's of the dominant manufacturing sector). Of note was the first above-50.0 reading in manufacturing new export orders for the first time in 18 months -- i.e. the duration of the trade war with the U.S. With the U.S. and China expected to sign-off on their phase-1 trade deal in the coming weeks, the data was tonic, at least for currencies, with stock markets sputtering after recent strong gains. We still 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 short 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. The UK's Telegraph newspaper today cited Phil Hogan, the new EU trade commissioner, predicting that prime minister Johnson will renege on his self-imposed legal commitment to exit the Brexit transition period by the end of 2020. Hogan drew attention to Johnson's high profile pledge to "die in a ditch" rather than let Brexit be extended beyond October. We concur with this view.

    [USD, CHF]
    EUR-CHF dove to a three-month low at 1.0840, which is the new 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]
    USD-CAD fell to a fresh five-month low, at 1.3044, in what is now sixth consecutive down week the pairing has seen. The Canadian dollar, like its dollar bloc brethren, was limited by above-forecast manufacturing PMI data out of China. The data elicited a fresh three-month high in oil prices. Front-month WTI crude posted a high at $62.25, and is now showing a gain of over 13.5% from November lows, and a rise of over 22% from the lows seen in September. Data showing drawdowns in U.S. crude reserves, along with and tensions in the Mideast, have been added factors underpinning oil prices. 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 in December has also weighed on USD-CAD. The pairing looks likely to continue to trade with a downside bias.

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