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By XE Market Analysis January 4, 2019 3:58 am
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    XE Market Analysis: Europe - Jan 04, 2019

    A reversal of risk-on positioning has seen the Yen underperform, while currencies with higher beta characteristics, such as the Australian Dollar and other Dollar bloc units, and developing world currencies, have outperformed most other currencies. The Dollar itself has traded mixed, on net, and EUR-USD settled to an oscillation of the 114.00 level. USD-JPY has lifted on the back of Yen weakness. A show of remarks from a slew of Japanese policymakers aimed at assuaging market nerves after yesterday's thin-market flash crash in USD-JPY, along with expectations for a strong December jobs report out of the U.S. today, which juxtaposes expectations for neutral Fed policy before an ultimate rate cut at the 18-months horizon, have lifted market spirits. There is also a degree of optimism about the U.S.-China trade talks slated for January 7-8 in Beijing, as increasing signs of real-world impact of the trade spat raises the incentives on both sides for compromise, and China also pledged to step up "countercyclical adjustments" of macro policies. In the U.S., the Democrat-controlled House passed bills that would reopen Federal government agencies, less the funding for the wall that Trump is demanding, but the White House quickly rejected by way of the veto threat, leaving the partial government shutdown no closer to being resolved. S&P 500 futures have rebounded by nearly 1% after the cash version of the index closed yesterday 2.5% for the worse. Japan's Nikkei 225 still closed 2.6% down in catch up trade as Tokyo markets reopened after a protracted break. USD-JPY lifted to the low-to-mid 108.0s, putting in some more distance from yesterday's flash-crash low at 104.81, but still leaving the pair below 109.00-plus levels that were prevailing ahead of the crash.

    [EUR, USD]
    EUR-USD settled to an oscillation of the 114.00 level after the whipsawing price action of earlier in the week, which left a near three-week low at 1.1309 and 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 are increasing signs of flagging economic growth momentum. 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 has lifted amid Yen underperformance as risk-off positioning unwound some in Asia. A show of remarks from a slew of Japanese policymakers aimed at assuaging market nerves after yesterday's thin-market flash crash in USD-JPY, along with expectations for a strong December jobs report out of the U.S. today, which juxtaposes expectations for neutral Fed policy before an ultimate rate cut at the 18-months horizon, have lifted market spirits. There is also a degree of optimism about the U.S.-China trade talks slated for January 7-8 in Beijing, as increasing signs of real-world impact of the trade spat raises the incentives on both sides for compromise, and Beijing said China will step up "countercyclical adjustments" of macro policies. In the U.S., the House of Reps passed bills that will reopen Federal government agencies, less the funding for the wall that Trump is demanding, but the White House quickly rejected by way of the veto threat, leaving the partial government shutdown no closer to being resolved. S&P 500 futures have rebounded by nearly 1% after the cash version of the index closed yesterday 2.5% for the worse. Japan's Nikkei 225 still closed 2.6% down in catch up trade as Tokyo markets reopened after a protracted break. USD-JPY lifted to the low-to-mid 108.0s, putting in some more distance from yesterday's flash-crash low at 104.81, but still leaving the pair below 109.00-plus levels that were prevailing ahead of the crash.

    [GBP, USD]
    Sterling has been on an overall steady-to-softer footing versus most currencies. Cable printed a 21-month low at 1.2455 yesterday (according to our data), since recovering to the 1.2700 area in price action that has been largely driven by Dollar volatility. UK markets this week 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. Yesterday's release of the UK 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. Brexit uncertainty continues to endure. The EU rejected the latest efforts by UK Prime Minister May to win concessions on the Irish board backstop, and it continues to look likely that her deal will be voted down at the upcoming parliamentary vote.

    [USD, CHF]
    EUR-CHF has recouped to around the 1.1250 level after yesterday punching out a four-month low at 1.1184, which was seen as the Swiss franc picked up safe haven demand in the wake of Apple's revenue warning (which in turn followed December manufacturing PMI data showing 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 has dropped for a second straight day, putting in some more distance from the 20-month peak that was seen at 1.3663. A rise in oil prices amid a revival in risk appetite in global markets has helped the Canadian Dollar, U.S. Fed funds futures have now priced out Fed tightening expectations for 2019 and are factoring in a 25 bp rate cut at the 18-month horizon. USD-CAD has descended into two-week low territory under 1.3450. The early December low at 1.3160 provides a downside waypoint.

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