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By XE Market Analysis January 10, 2020 3:43 am
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    XE Market Analysis: Europe - Jan 10, 2020

    The yen posted fresh lows as global stock markets hit new record highs, while the likes of the Australian dollar and many developing-nation currencies rallied. USD-JPY, now in its fifth consecutive up day, printed a fresh two-week high at 107.60, which is just 12 pips shy of the seven-month high that was seen in early December. EUR-JPY lifted to an eight-day high, and AUD-JPY to a five-day. In stock markets, the MSCI all-country world index hit a new record high today, which followed the record highs that the three main U.S. indices and the pan-Europe Stoxx 600 equity index saw yesterday. Oil prices remained heavy, some 11% down on the high seen just a couple of days ago, with the U.S. and Iran having stepped back from the cliff edge. News that iPhone sales in China rose 18% y/y in December gave tech stocks a boost, while also boding well for U.S.-Sino relations, with China's Vice Premier Liu, head of Beijing's trade negotiation team travelling to Washington next week to sign the phase-1 trade deal with the U.S. Elsewhere in forex markets, the dollar has traded mixed, leaving the narrow trade-weighted USD index (DXY) net unchanged. EUR-USD remained settled in a narrow range near 1.1100. The dollar lost ground to the Australian currency, with AUD-USD lifting to a two-day high at 0.6882 in what is the pair's first up day of the year so far. Cable remained below the 1.3100 level, while USD-CAD settled just above 1.3050, below the two-week high seen yesterday at 1.3104. The release of the U.S. December employment report will be a major focus for markets today. We expect a 180k headline increase (median 178k), but note downside risk from weak producer sentiment, the rise in claims through the holiday period, and a lean ADP jobs path.

    [EUR, USD]
    EUR-USD remained settled in a narrow range near 1.1100. The release of the U.S. December employment report will be a major focus for markets today. We expected a 180k headline increase (median 178k), but note downside risk from weak producer sentiment, the rise in claims through the holiday period, and a lean ADP jobs path. 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. Momentum has faded with the Fed having back out of its tightening cycle after hiking rates three times last year. Markets are discounting just over 50% odds for the Fed to cut by 25 bps or more by the end of 2020. The ECB, meanwhile, is embedded in a wait-and-see policy stance.

    [USD, JPY]
    The yen posted fresh lows as global stock markets hit new record highs, while the likes of the Australian dollar and many developing-nation currencies rallied. USD-JPY, now in its fifth consecutive up day, printed a fresh two-week high at 107.60, which is just 12 pips shy of the seven-month high that was seen in early December. EUR-JPY lifted to an eight-day high, and AUD-JPY to a five-day. In stock markets, the MSCI all-country world index hit a new record high today, which followed the record highs that the three main U.S. indices and the pan-Europe Stoxx 600 equity index saw yesterday. Oil prices remained heavy, some 11% down on the high seen just a couple of days ago, with the U.S. and Iran having stepped back from the cliff edge. News that iPhone sales in China rose 18% y/y in December gave tech stocks a boost, while also boding well for U.S.-Sino relations, with China's Vice Premier Liu, head of Beijing's trade negotiation team travelling to Washington next week to sign the phase-1 trade deal with the U.S. We are bullish of USD-JPY. The U.S. is enjoying what looks like a goldilocks economy -- growth slower, but still holding comfortably in positive expansion with inflation remaining benign -- while the risk-on vibe in global markets should maintain Japan's yield-hungry investors' confidence in foreign investments.

    [GBP, USD]
    The pound has settled after diving by over 0.5% yesterday on BoE remarks from Governor Carney, who, despite noting some early signs of improvements since last month's election, described economic growth as remaining below potential while disclosing that members have been discussing stimulus. This comes with two MPC members, Saunders and Haskell, having voted for 25 bps rate cutes at the last two policy meetings. Cable hit a two-week low at 1.3012, since settling above 1.3050. UK prime minister Johnson met with European Commission chief von de Leyen this week, which produced a lot platitudes about mutual respective, common ground, etc, as the two sides commence talks about a new trading relationship. Before their meeting, Von de Leyen had made clear that a comprehensive agreement would be "impossible" in the 11-month time frame Johnson has set, which is a view that ourselves, and many others, concur with. The reality of the UK government having to work out trade deals that would match pre-Brexit benefits (member of the EU's single market, plus the 40 trade deals has with 70 global economies and trading areas) -- a process that is likely to take years -- should keep a cap the pound's upside potential.

    [USD, CHF]
    EUR-CHF found a footing after posting a 32-month low at 1.0788 this week following news of Iran's missile strike on two U.S. bases in Iraq. A reversal in risk-off positioning supported the cross with both the U.S. and Iran having stepped back from the cliff edge. The franc continues to play a role as a safe-haven currency, despite the hostile monetary policy of the SNB. Yesterday's low was the culmination of quite a sharp drop from the seven-week peak of December 13, at 1.1033.

    [USD, CAD]
    USD-CAD settled just above 1.3050, below the two-week high seen yesterday at 1.3104. The pair has been buoyed this week by the 10%-plus correction in oil prices, and has put in some distance from the three-month low seen on December 31 at 1.2951. A big focus will be on the dual releases of the December employment reports out of the U.S. and Canada, today. For the U.S. release, we expect a 180k payroll rise (median 178k) that matches the 180k year-to-date average, with the jobless rate seen holding at 3.5%, alongside gains of 0.1% for hours-worked and 0.3% for hourly earnings. The data face modest downside risk from producer sentiment weakness led by a December ISM drop, a rise in claims through the holidays, and a December vehicle sales drop alongside an assumed pull-back in the vehicle assembly rate to the 11.0 mln area. As for the Canadian employment report, we expect a 50.0k rebound in December after the -71.2k plunge in November. The unemployment rate is seen falling to 5.7% from 5.9%. Overall, we anticipate the data to be bearish for USD-CAD.

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