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By XE Market Analysis January 3, 2019 3:57 am
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    XE Market Analysis: Europe - Jan 03, 2019

    The Yen has strengthened sharply, driven by safe haven demand following Apple's after-hours revenue warning, which has sent U.S. equity futures down sharply while weighing on Asian markets. AUD-JPY has been the biggest mover, and is showing a 1.8% loss despite having lifted out of its lows. USD-JPY is off by 1.4%, at 107.35, having printed a 10-month low at 104.81. The low was seen during the early Asia-Pacific session, in thin markets in the continued absence of the Tokyo interbank market. Elsewhere, the Dollar, outside the case of USD-JPY, traded higher on the back of the risk-off dynamic. EUR-USD settled to the upper 1.1300s after earlier posting a 17-day low at 1.1309. AUD-USD recouped to levels around 0.6950 after printing a low at 0.6726, which is the lowest the pair has been since March 2009. Cable printed a 21-month low at 1.2455 before recouping to around 1.2550. USD-CAD logged a 20-month peak at 1.3656.

    [EUR, USD]
    EUR-USD settled to the upper 1.1300s after earlier posting a 17-day low at 1.1309. The low was driven amid a risk-off dynamic following Appel's revenue warning, which lifted the Dollar versus most currencies (the Yen being the main exception). EUR-USD had yesterday seen a two-month high just shy 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. Resistance comes in at 1.1439-40.

    [USD, JPY]
    USD-JPY plummeted from levels above 109.00 to a 10-month low at 104.81 before recouping back above 107.50. The move was driven by sharp Yen gains the early Asia-Pacific session, in thin markets in the continued absence of the Tokyo interbank market, driven by safe haven demand following Apple's after-hours revenue warning, which has sent U.S. equity futures down sharply while weighing on Asian and European markets. 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. 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.

    [GBP, USD]
    Cable printed a 21-month low at 1.2455 before recouping to around 1.2550. The drop was driven by broader Dollar strength amid a rush for safe havens following Apple's discouraging guidance. The same dynamic drove GBP-JPY sharply lower, too. The Pound also lost ground to the Euro, albeit to a comparatively more modest extent. UK markets yesterday ignored the stronger than expected headline reading in the December UK manufacturing PMI, which showed that Brexit contingency-related activity had buoyed activity in the sector, with the underlying trend remaining demonstrably weak. The UK's December construction PMI came in near expectations at 52.8 in the headline reading, a three-month low and down from 53.4 in November. Regarding Brexit, it's clear that there won't be any renegotiation by the EU and that, in all likelihood, despite the best efforts of UK Prime Minister May, 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, a new EU referendum will be the path of least resistance. We anticipate that the Pound will 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 a disorderly no-deal Brexit scenario to be avoided.

    [USD, CHF]
    EUR-CHF punched out a four-month low at 1.1184, and USD-CHF printed a three-month low as the Swiss franc picked up safe haven demand in the wake of Apple's revenue warning, which came after December manufacturing PMI data yesterday showed weakening across key global economies. 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 logged a 20-month peak at 1.3656 amid safe haven demand for the U.S. Dollar following Apple's revenue warning. The risk-off vibe also weighted on oil prices, further buoying the USD-CAD pairing. We retain a bullish view of USD-CAD. Support comes in at 1.3565-68. The 2017 high at 1.3793 provides an upside waypoint.

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