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By XE Market Analysis January 2, 2019 3:25 am
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    XE Market Analysis: Europe - Jan 02, 2019

    The Dollar has traded mostly weaker, with EUR-USD punching out a two-month high within a whisker of 1.1500 while USD-JPY dove to a seven-month low of 109.12. Most of the USD-JPY price action dynamic has been a reflection of general Yen strength, driven by safe haven demand as stock markets across Asia and U.S. equity futures made a negative start to 2019 trading. Sub-forecast manufacturing PMI readings from Asian nations, led by China, fed the global-slowdown narrative in markets. China's December manufacturing PMI (Caixin) fell to a 19-month low of 49.7, down from 50.2 in November. The median forecast had been for a 50.1 reading, and the data followed the two-year low that has already been reported in the official PMI survey out of China. Malaysia’s manufacturing PMI, meanwhile, fell to a six-year-plus low, and Taiwan's to a three-year-plus low, while Singapore's Q4 GDP missed forecasts, driven by a q/q contraction in the manufacturing sector. Among the Yen crosses, AUD-JPY has registered the biggest movement, falling by nearly 1% in making a 27-month low of 76.56. Much attention will be on upcoming trade talks between the U.S. and China.

    [EUR, USD]
    EUR-USD punched out a two-month high within a whisker of 1.1500. Heading into 2019, we are taking a more neutral view of the Dollar after being bullish for much of 2018. U.S. monetary policy has ceased to be a support, with Fed fund futures having now largely priced out any hike for 2019, and now imply a 25 bp cut by mid-2020. On the Euro side of the coin, there have been some conflicting forces, with signs of flagging economic growth momentum on the one hand, and a rally in Italian assets on the back of a Brussels-appeasing budget proposal, on the other. We see EUR-USD as having entered a broadly sideways range phase as markets continue to fathom the push of the populist political movement in Europe and the pull of a more neutral Fed policy stance. Support comes in at 1.1439-40 and resistance at 1.1500.

    [USD, JPY]
    USD-JPY has dropped to a seven-month low 109.12 amid a general Yen strength, driven by safe haven demand as stock markets across Asia and U.S. equity futures made a negative start to 2019 trading. Sub-forecast manufacturing PMI readings from Asian nations, led by China, fed the global-slowdown narrative in markets. China's December manufacturing PMI (Caixin) fell to a 19-month low of 49.7, down from 50.2 in November. The median forecast had been for a 50.1 reading, and the data followed the two-year low that has already been reported in the official PMI survey out of China. Malaysia’s manufacturing PMI, meanwhile, fell to a six-year-plus low, and Taiwan's to a three-year-plus low, while Singapore's Q4 GDP missed forecasts, driven by a q/q contraction in the manufacturing sector. Among the Yen crosses, AUD-JPY has registered the biggest movement, falling by nearly 1% in making a 27-month low of 76.56. Much attention will be on upcoming trade talks between the U.S. and China. The two nations are amid a 90-day truce, and President Trump has already claimed "big progress" following a phone call with Xi at the weekend. Both sides have a gulf of difference between them on commercial practices and intellectual property rights, with many other nations sympathetic to the U.S. view on this front. We take a bearish view of USD-JPY on the view that global stock market volatility will remain peaky well into 2019, seeing scope for deeper corrections after a near decade winning streak, with valuations needing to adjust to a world with less accommodative liquidity and slowing economic growth. Such a backdrop would maintain demand for the safe haven yen. U.S. monetary policy, meanwhile, has ceased to be a support for the dollar. Fed fund futures have now largely priced out any hike for 2019, and imply a 25 bp cut by mid-2020.

    [GBP, USD]
    The Pound has been trading without domestically-driven direction since mid December, which follows a sustained period of Brexit-related declines. A 20-month low versus the dollar was seen at 1.2476 on December 12, and the pair has since climbed to the 1.2750-1.2800 area. The London interbank market has reopened to full force today after an extended period of operating at skeletal staffing levels. The UK Prime Minister will likely continue to plug away in her diplomatic effort to sweeten the Brexit deal, although it's clear that there won't be any renegotiation by the EU. This suggests that the Withdrawal Agreement from the EU is headed for eventual failure in the UK Parliament. The parliamentary vote on the Brexit deal and outline for a future relationship will take place in the week of January 14, before the legislated deadline of January 21. Our best guess remains that Parliament will vote down the deal and, of all the possible scenarios at that point, that a new EU referendum will be the path of least resistance. We anticipate that the Pound with remain a sell-into-gains trade into the vote, but also see potential for the currency to rally between 5% and 10% as we expect disorderly no-deal Brexit scenario to be avoided.

    [USD, CHF]
    EUR-CHF has continued to gravitate around 1.1250-1.1300. The cross has remained comfortably above the two-and-a-half month low seen in December at 1.1225. The SNB remained firmly on hold at its quarterly policy meeting last month, continuing to rely on the combination of negative interest rates and the threat of intervention to limit appreciation in the currency in times of heightened uncertainty about the global outlook.

    [USD, CAD]
    USD-CAD has dropped back under 1.3500 amid a broader bout of U.S. Dollar weakness. Markets look to be continuing to price the Fed's policy outlook shift to more neutral footing, which has offset the impact of weakness in oil prices on the Canadian currency. USD-CAD has support at 1.3565-68. The 2017 high at 1.3793 provides an upside waypoint.

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