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By XE Market Analysis January 13, 2020 3:47 am
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    XE Market Analysis: Europe - Jan 13, 2020

    Sterling has taken a turn lower in early week trading, with markets reacting to both dovish BoE-speak and to a report from the UK's Institute for Government finding that it will be impossible to deliver the computer systems for the special arrangements for Northern Ireland's border by the end of the year. Prime minister Johnson has pledged, and worked into the Withdrawal Agreement legislation, to leave the post-Brexit transition period by the end of the year, hence the negative reaction by markets. Ireland's deputy prime minister Coveney also said that forming a new trade deal between the EU and UK is "probably going to to take longer than a year." Member of the BoE's Monetary Policy Committee Vlieghe, meanwhile, said in the FT over the weakened that he is ready to cut rates if data doesn't improve, similar to the view expressed by governor Carney last week. Cable has dropped nearly 0.5% in printing a 17-day low at 1.2999, while EUR-GBP has risen by a similar magnitude in making a 17-day peak at 0.8560. Elsewhere, EUR-USD has lifted above its Friday high in making 1.1132 in a move driven by moderate euro outperformance. EUR-JPY has posted a two-week high at 122.05, while EUR-CHF and other euro crosses have also seen gains. The yen remained on a generally weak footing as Asia's MSCI Asia-Pacific index hit a new 19-month high with investors anticipating Wednesday's signing of the U.S.-China phase-1 trade deal. USD-JPY was buoyant, though remained below Friday's 18-day high at 109.68, while AUD-JPY posted a fresh 10-day peak. AUD-USD, posted a six-day peak. Liquidity was below par in Asia with Japanese markets closed for a public holiday. The U.S.-China trade deal will be a major focus this week as the details haven't been made public.

    [EUR, USD]
    EUR-USD has lifted above its Friday high in making 1.1132 in a move driven by moderate euro outperformance. EUR-JPY has posted a two-week high at 122.05, while EUR-CHF and other euro crosses have also seen gains. The dollar itself has traded softer in the wake of Friday's below forecast U.S. jobs report for December. U.S. nonfarm payrolls missed with a rise of 145k, while wages and hours worked were soft. Markets are factoring in just over a 55% chance for the Fed to cut by 25 bps or more by year end, up from about the 50% odds being given ahead of the jobs report. The ECB, meanwhile, is embedded in a wait-and-see policy stance. 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.

    [USD, JPY]
    The yen has remained on a generally weak footing as Asia's MSCI Asia-Pacific index hit a new 19-month high with investors anticipating Wednesday's signing of the U.S.-China phase-1 trade deal. USD-JPY was buoyant, though remained below Friday's 18-day high at 109.68, while AUD-JPY posted a fresh 10-day peak, and EUR-JPY posted a two-week high at 122.05. The U.S.-China trade deal will be a major focus this week as the details haven't been made public. There are also some doubts about whether China will stick to increased purchases of U.S. goods. Global stock markets have remained buoyant regardless. The trade issues aside, the real underpinnings of global asset markets have been persisting benign inflation and accommodation central banks. The MSCI all-country world index hit a record highs last week, and looks primed to made further records this week, assuming there aren't any negative surprises from the U.S.-China deal. China's Vice Premier Liu, head of Beijing's trade negotiation team, is travelling to Washington this week to sign the trade deal with the U.S. The Trump administration has invited 200 dignitaries to the White House to witness the signing. 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]
    Sterling has taken a turn lower in early week trading, with markets reacting to both dovish BoE-speak and to a report from the UK's Institute for Government finding that it will be impossible to deliver the computer systems for the special arrangements for Northern Ireland's border by the end of the year. Prime minister Johnson has pledged, and worked into the Withdrawal Agreement legislation, to leave the post-Brexit transition period by the end of the year, hence the negative reaction by markets. Ireland's deputy prime minister Coveney also said that forming a new trade deal between the EU and UK is "probably going to to take longer than a year." Member of the BoE's Monetary Policy Committee Vlieghe, meanwhile, said in the FT over the weakened that he is ready to cut rates if data doesn't improve, similar to the view expressed by governor Carney last week. Carney, 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 has dropped nearly 0.5% in printing a 17-day low at 1.2999, while EUR-GBP has risen by a similar magnitude in making a 17-day peak at 0.8560. UK prime minister Johnson met with European Commission chief von de Leyen last 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 last 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 has settled just above 1.3050, below the two-week high seen mid last Thursday at 1.3104. The pair has been buoyed by the sharp, 10%-plus correction in oil prices as the U.S.-Iran stand-off de-escalated. This in turn undermined the Canadian dollar, with the consequence of USD-CAD putting in some distance from the three-month low seen on December 31 at 1.2951. Last Friday's dual releases of the December employment reports out of the U.S. and Canada, saw the former miss and the latter exceed expectations a little, though the impact on USD-CAD wasn't long standing with the pair recouping losses seen in the immediate wake of the data.

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