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By XE Market Analysis January 7, 2020 4:38 am
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    XE Market Analysis: Europe - Jan 07, 2020

    The Australian dollar has remained under pressure, despite global stock markets having taken a turn higher as markets reappraise the U.S. versus Iran stand off. A Caixin report saying that China will not increase its annual low-tariff import quotas for U.S. agricultural produce raised doubts with regard to the yet-to-be-signed "phase-1" trade deal. There was also a research note from Citi analysts highlighting that upside Chinese data surprises have been diminishing since mid December. This appeared to weigh on the Aussie, which is widely seen as a liquid China proxy currency. AUD-USD dropped just over 0.5% in making a two-week low at 0.6898, while AUD-JPY fell by a similar magnitude in making a 26-day low.The pairing and cross are showing respective losses of 1.9% and 1.6% from their closing levels on December 31. Australian OIS is pricing in a 54% probability for the RBA to cut interest rates by 25 bps at its early February policy meeting, up from the around 38% odds that were being factored in late December. Elsewhere, the yen weakened against the dollar and some other currencies, outside the case for AUD-JPY, as some of its safe haven premium unwound, though firmed back some in the latest phase. USD-JPY lifted to a 108.50 rebound high, up from yesterday's 107.77 low. The dollar traded mostly firmer, retracing losses seen yesterday by varying degrees. The narrow trade-weighted USD index (DXY) rebounded about half of the drop it saw yesterday in lifting back above 96.75. This saw EUR-USD ebb back under the 1.1200 level. Sterling has been perky, printing five-day highs against the dollar, euro and yen today.

    [EUR, USD]
    EUR-USD ebbed back under the 1.1200 level as the dollar recouped some of the losses it saw yesterday. The pair remains comfortably above Friday's 11-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. While the situation doesn't look good (President Trump threatening major retaliation" to any Iran response, and Tehran vowing to expel the U.S. from the region), markets have reappraised the risks and currently are taking the view that a full-scale war is unlikely and that Mid-East oil supply should continue to flow. So far in the new year the dollar has been influenced by safe haven demand on the one hand, and Fed easing expectations on the other, with markets discounting about 60% 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 weakened against the dollar and some other currencies, outside the case for AUD-JPY, as some of its safe haven premium unwound, though firmed back some in the latest phase. USD-JPY lifted to a 108.50 rebound high, up from yesterday's 107.77 low. Market participants have reappraised the U.S.-Iran situation. While the situation doesn't look good (President Trump threatening major retaliation" to any Iran response, and Tehran vowing to expel the U.S. from the region), markets are presently taking the view that a full-scale war is unlikely and that Mid-East oil supply should continue to flow. This should, for now, keep USD-JPY underpinned.

    [GBP, USD]
    Sterling has been perky, printing five-day highs against the dollar, euro and yen today. Cable's high is 1.3212. The UK currency, despite rallying strongly during the final quarter 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. 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 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. Many observers, including ourselves, expect prime minister Johnson to renege on his self-imposed legal commitment to exit the Brexit transition period by the end of 2020. Johnson has plenty of form in U-turning from high profile pledges, most recently his promise to "die in a ditch" rather than let Brexit be extended beyond October (his promise while Mayor of London to "lie down" in front the bulldozers to stop the expansion of Heathrow airport was another). We 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 has inched out a one-week low at 1.2957, which swings the three-month low seen on December 31 at 1.2951 into scope. The surge in oil prices over the last several months, which has been extended by the flare-up in U.S.-Iran tensions, has been underpinned the Canadian dollar. Front-month WTI crude, while softer today, remains up by over 23% from the lows seen last September. Gains of that magnitude, if sustained, are a big boon to Canada's terms of trade, hence the correlation between oil prices and the Canadian currency. 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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