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By XE Market Analysis January 8, 2020 3:40 am
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    XE Market Analysis: Europe - Jan 08, 2020

    The yen surged and then sharply unwound gains in volatile trading during morning trading in Tokyo. The rally in the Japanese currency was part of a broader dash for safe haven assets and currencies following news that Iran had fired missiles at two U.S. bases in Iraq. The U.S. reported no casualties, and President Trump's initial tweet responses were notable for the lack of bellicosity, saying that "All is well!" and "So far, so good." Official Iranian statements were also measured, though warned the of "a painful response" to any further U.S. action, while the Islamic Revolutionary Guard Corps said that "Operation Martyr Soleimani" had only just begun. The more hawkish members of Trump's Republican party also signalled that Tehran had gravel miscalculated U.S. resolve. Trump said he would make a statement on Wednesday morning, which will be a major focus for markets. More volatility in global markets seems assured given the uncertainty about the situation, although both sides are showing a clear desire to avoid a full-blown war. The burst of yen buying drove USD-JPY to a three-month low at 107.65 before the pair rebounded to near net unchanged levels in the mid 108.00s. The rebound mirrored a recovery in stock markets in Asia, though most of the indices across the region, while off their lows, have remained firmly in the red. Oil and gold prices also spiked to fresh trend highs before retreating some. USD-CAD dropped back below 1.3000 concomitantly with the oil price rise, though the pairing remained above recent lows. EUR-USD remained in a narrow range around 1.1150. Sterling ticked moderately higher, but remained within its respective Tuesday ranges against the dollar and euro. AUD-USD printed a fresh three-week low at 0.6850 before rebounding back above 0.6880.

    [EUR, USD]
    EUR-USD remained in a narrow range around 1.1150. The pair remains comfortably above Friday's 12-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, with Iran lunching missiles at two U.S. airbases in Iraq. 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 surged and then sharply unwound gains in volatile trading during morning trading in Tokyo. The rally in the Japanese currency was part of a broader dash for safe haven assets and currencies following news that Iran had fired missiles at two U.S. bases in Iraq. The U.S. reported no casualties, and President Trump's initial tweet responses were notable for the lack of bellicosity, saying that "All is well!" and "So far, so good." Official Iranian statements were also measured, though warned the of "a painful response" to any further U.S. action, while the Islamic Revolutionary Guard Corps said that "Operation Martyr Soleimani" had only just begun. The more hawkish members of Trump's Republican party also signalled that Tehran had gravel miscalculated U.S. resolve. Trump said he would make a statement on Wednesday morning, which will be a major focus for markets. More volatility in global markets seems assured given the uncertainty about the situation, although both sides are showing a clear desire to avoid a full-blown war. The burst of yen buying drove USD-JPY to a three-month low at 107.65 before the pair rebounded to near net unchanged levels in the mid 108.00s. The rebound mirrored a recovery in stock markets in Asia, though most of the indices across the region, while off their lows, have remained firmly in the red.

    [GBP, USD]
    Sterling ticked moderately higher, but remained within its respective Tuesday ranges against the dollar and euro. UK prime minister Johnson will be meeting with new president of the European Commission, Ursula von der Leyen, along with the EU's chief Brexit negotiator, Barmier, tomorrow. This is where the UK will finally start to talk about a new, post Brexit, trade deal with the EU, and comes with Johnson pledging to limit the post-Brexit transition period to the end of this year, which has been worked into the withdrawal agreement legislation. Von der Leyen argued in a recent interview with Les Echos that it will take longer than 11 months for the EU and UK to reach a new trade agreement. Phil Hogan, the new EU trade commissioner, also predicted, as did S&P Ratings and others, 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 track record for breaking promises, highlighting his pledge last year to "die in a ditch" rather than let Brexit be extended beyond October (another high profile broken promise, made during his campaign to become the Mayor of London, was his pledge to "lie down" in front the bulldozers to stop the expansion of Heathrow airport). We don't see Johnson as being serious about taking UK out of the EU without a trade deal, with the influence of the hardcore Brexit faction of his party having been diluted at the election, and given he has five years before the next election is due. But for now, expect Johnson to remain rhetorically resolute, which cap the pound's upside potential.

    [USD, CHF]
    EUR-CHF rebounded back above 1.0800 after posting a 32-month low at 1.0788 following news of Iran's missile strike on two U.S. bases in Iraq. The franc continues to play a role as a safe haven, despite the hostile monetary policy of the SNB. The new low is the culmination of quite a sharp drop from the seven-week peak of December 13, at 1.1033.

    [USD, CAD]
    USD-CAD dropped back below 1.3000 concomitantly with oil prices rising to fresh trend highs following news of Iran's missile strike on two U.S. bases in Iraq. The pairing remained above the three-month low seen on December 31 at 1.2951. 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 underpinning the Canadian dollar. Front-month WTI crude is up by some 24% 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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