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By XE Market Analysis January 6, 2020 3:36 am
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    XE Market Analysis: Europe - Jan 06, 2020

    The yen posted fresh highs as stock markets continued to fall in Asia with market participants fretting about upscaling risks for a deepening conflict between the U.S. and Iran. President Trump threatened "major retaliation" if Iran responded to the U.S. assassination of one of Iran's top generals, while Tehran vowed to expel the U.S. from the region. Gold prices rose a further 1.5%, and are up over 3.5% from levels prevailing before news of the U.S. strike broke on Friday. USD-JPY printed a near three-month low, at 107.77, as the yen's safe-haven premium rose. AUD-JPY, a forex market barometer of risk appetite in global markets, pegged a 25-day, though not all yen crosses, including EUR-JPY, surpassed their Friday lows. Tokyo markets returned from Japan's extended new-year break, and the Nikkei 225 played catch by closing with a near 2% loss. The dollar remained generally well bid, outside the case of USD-JPY, although mostly holding above highs seen on Friday. EUR-USD traded a narrow range around the 1.1160-65 mark, above Friday's low at 1.1124. Cable also saw a narrow range, just below 1.3100. AUD-USD sank back to a 0.6933 low after rebounding to an intraday peak at 0.6955, leaving Friday's 11-day low at 0.6930 unchallenged. Oil prices, not surprisingly, posted fresh highs, with front-month WTI futures up 1.7% at $64.14, earlier posting a nine-month high at $64.72. Middle Eastern OPEC members account for an estimated 64.5% of proven global crude reserves. The rise in oil prices saw USD-CAD drop back under 1.3000, reversing most of the rebound seen on Friday.

    [EUR, USD]
    EUR-USD traded a narrow range around the 1.1160-65 mark, above Friday's 10-day low at 1.1124. The low was a product of dollar strength, which picked up safe-haven demand market participants fretted about upscaling risks for a deepening conflict between the U.S. and Iran. The situation doesn't look good. President Trump threatened "major retaliation" if Iran responded to the U.S. assassination of one of Iran's top generals, while Tehran vowed to expel the U.S. from the region. The euro has fared better against sterling and the commodity bloc currencies, particularly the underperforming Australian and Zealand units. As for the dollar, safe haven demand has dominated, with gains coming despite markets discounting about 60% odds for the Fed to cut rates by 25 bps or more by the 2020 December FOMC (up from 50% a day ago). 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 posted fresh highs as stock markets continued to fall in Asia with market participants fretting about upscaling risks for a deepening conflict between the U.S. and Iran. President Trump threatened "major retaliation" if Iran responded to the U.S. assassination of one of Iran's top generals, while Tehran vowed to expel the U.S. from the region. Gold prices rose a further 1.5%, and are up over 3.5% from levels prevailing before news of the U.S. strike broke on Friday. USD-JPY printed a near three-month low, at 107.77, as the yen's safe-haven premium rose. AUD-JPY, a forex market barometer of risk appetite in global markets, pegged a 25-day, though not all yen crosses, including EUR-JPY, surpassed their Friday lows. Tokyo markets returned from Japan's extended new-year break, and the Nikkei 225 played catch by closing 1.9% for the worse.

    [GBP, USD]
    Sterling has found a toehold after Cable and GBP-JPY hit four- and eleven-day lows respectively, on Friday, amid safe-haven positioning on news of the U.S. strike that took out a senior officer in the Iranian military. The pound, despite rallying strongly during the last part of last year, is starting the new year trading at a discount of about 8-9% in trade-weighted terms from levels prevailing ahead of the vote to leave the EU in 2016. Market narratives have been highlighting expectations for tough negotiations ahead for the UK with the EU and other global economies and trading blocs. The reality is that it will take years to replicate the trading terms the UK has enjoyed as part of the EU's single market, along with the 40 trade deals the EU has with some 70 other economies and trading areas. Brexit is set to happen at the end of January, at which point 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. The UK's Telegraph newspaper earlier in the week cited Phil Hogan, the new EU trade commissioner, predicating 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, and anticipate that the Brexit rubber hitting the road will curtail the pound's upside potential in 2020.

    [USD, CHF]
    EUR-CHF has found a toehold after dropping on Friday to a four-month low at 1.0824, weighed on by safe-haven positioning on news of the U.S. military strike that took out a senior Iranian officer. The new low 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]
    USD-CAD dropped back under 1.3000, reversing most of the rebound seen on Friday as oil prices printed fresh trend highs as market participants fret about upscaling risks for a deepening conflict between the U.S. and Iran. President Trump threatened "major retaliation" if Iran responded to the U.S. assassination of one of Iran's top generals, while Tehran vowed to expel the U.S. from the region. Front-month WTI futures were showing a 1.7% gain heading into the London session, at $64.14, earlier posting a nine-month high at $64.72. Middle Eastern OPEC members account for an estimated 64.5% of proven global crude reserves. The Fed's removing a forecast for a 25 bps hike in 2020 at its FOMC policy meeting in December has also been weighing on USD-CAD, with markets presently discounting about 60% odds for the Fed to cut rates by 25 bps or more by the end of 2020. The pairing looks likely to continue to trade with a overall downside bias.

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