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By XE Market Analysis January 15, 2020 3:21 am
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    XE Market Analysis: Europe - Jan 15, 2020

    The yen has firmed up amid trimming of risk-on positioning in global markets after U.S. Treasury Secretary Mnuchin said late yesterday that tariffs on Chinese goods would remain in place until the completion of the second phase of the U.S.-China trade agreement. The U.S. government was also reported to be near publication of a rule that would increase its ability to block shipments of foreign-made goods to China’s Huawei. These developments, which have overshadowed the PBoC's extension of short- and medium-term loans today, saw stock markets retreat and safe-haven premiums richen. The MSCI Asia-Pacific index retreated from the 19-month high seen yesterday, while USD-JPY posted a two-day low at 109.81. AUD-JPY, widely viewed as a forex proxy on China, also ebbed to two-day lows. The dollar, meanwhile, has been trading with a mixed-to-softer bias following yesterday's sub-forecast CPI data out of the U.S (though we are expecting an up-tick in inflation in the months ahead as the sharp drop in commodity prices last winter will provide a jump in y/y comparisons). EUR-USD, still remaining in an overall low-volatility low-range stasis, settled near 1.1130 after lifting out of yesterday's low at 1.1104. Cable edged out a two-day high at 1.3042. AUD-USD remained within its Tuesday range, as did USD-CAD, holding below the six-day high seen at 1.3079. Oil prices posted fresh lows in the wake of Mnuchin's remarks. Front-month WTI futures hit a six-week low at $57.72 before finding a foothold.

    [EUR, USD]
    EUR-USD still remains in an overall low-volatility low-range stasis, settling near 1.1130 today after lifting out of yesterday's low at 1.1104 following a sub-forecast reading in U.S. December CPI. We are expecting an up-tick in inflation in the months ahead as the sharp drop in commodity prices last winter will provide a jump in y/y comparisons. The dollar itself has lost some buoyancy in the wake of last 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 about a 57% 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 firmed up amid trimming of risk-on positioning in global markets after U.S. Treasury Secretary Mnuchin said late yesterday that tariffs on Chinese goods would remain in place until the completion of the second phase of the U.S.-China trade agreement. The U.S. government was also reported to be near publication of a rule that would increase its ability to block shipments of foreign-made goods to China’s Huawei. These developments, which have overshadowed the PBoC's extension of short- and medium-term loans today, saw stock markets retreat and safe-haven premiums richen. The MSCI Asia-Pacific index retreated from the 19-month high seen yesterday, while USD-JPY posted a two-day low at 109.81. AUD-JPY, widely viewed as a forex proxy on China, also ebbed to two-day lows.

    [GBP, USD]
    The pound has settled at firmer levels after yesterday printing new lows against both the dollar and euro. Cable recouped back above 1.3000 after hitting a three-week low at 1.2954 yesterday, in what was the sixth trading day of declines. EUR-GBP, meanwhile, left seven-week high at 0.8596. The UK currency is remaining heavy in the wake of UK November production and GDP data misses, and dovish BoE-speak. The implementation of post-Brexit border systems in Northern Ireland has also become an issue, while and increasing body of EU officials and others have been saying that 11 month time frame prime minister Johnson has allowed for trade negotiations before leaving the transition period is insufficient time for the UK to negotiate a comprehensive new trade agreement with the EU, and other global economies and trading blocs. BoE members Carney and Vlieghe have in recent days also signalled a rise in dovishness the the Monetary Policy Committee, and some analysts, such as those at RBS, are now forecasting a 25 bp rate cut at the January-30 policy meeting. The UK's OIS market is implying about 50-50 odds for such as rate cute this month, and is fully discounting such a move by September. We expect the pound will retain a downward bias for now. UK December inflation data today is expected to show a continued benign picture, with the CPI headline forecast at 1.5% y/y (median same), which would be unchanged from the month prior and remain well off the BoE's 2.0% mandated target.

    [USD, CHF]
    EUR-CHF has remained heavy after yesterday diving to a 33-month low at 1.0759. News that the U.S. will retain tariffs on Chinese goods imports until a second phase of a trade deal with China has been completed saw risk aversion kick up in global markets, which in turn boosted the Swiss currency. The new low in the EUR-CHF cross is the culmination of quite a sharp drop from the seven-week peak of December 13, at 1.1033.

    [USD, CAD]
    USD-CAD has settled below the six-day high seen yesterday at 1.3079. We anticipated the pairing to retain an upward bias for now, with risk appetite having abated in global markets following news that the U.S. will retain tariffs on Chinese goods imports until a second phase of a trade deal with China is completed. This will likely continue to weigh on oil prides after front-month WTI futures hit a six-week low at $57.72.

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