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By XE Market Analysis January 17, 2020 3:24 am
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    XE Market Analysis: Europe - Jan 17, 2020

    The yen posted fresh lows once again as risk appetite continue to course through global markets. The MSCI all-country world equity index touched fresh record highs earlier, even though Chinese markets have sputtered somewhat and momentum appears to have waned a little. An above-forecast 6.9% y/y rise in China's industrial production helped maintain the risk-on times, which followed a solid round of U.S. data releases yesterday and some strong corporate earnings results. USD-JPY rallied to a fresh eight-month peak at 110.28, marking the eighth day out of the last 10 where the pairing has gained. Yen crosses also remained firm. CAD-JPY pegged an eight-and-a-half month peak, and while EUR-JPY and AUD-JPY remained off their respective trend highs from yesterday, both are higher on the day. AUD-USD rebounded back above 0.6900 after dipping to a two-day low at 0.6884. The Australian dollar hasn't been performing as well as it might in the context of the strength in global equity markets and the good vibes coming from the trade negotiation between the U.S. and China this week. Recent data has been showing that the domestic economy is amid a consumer-led slowdown, which is being exacerbated by the worst-in-decades wildfires. Australian interbank cash rate futures imply a 56% probability for the RBA to cut interest rates by 25 bp at its February-4 policy meeting, up from the 47% odds that were being implied at the start of the week. The Swiss franc came off the boil after rallying precipitously following the logic-defying decision by the U.S. to add Switzerland to its list of currency manipulators earlier in the week. EUR-CHF lifted back above 1.0750 after yesterday hitting a 33-month low at 1.0732. EUR-USD traded narrowly around 1.1130-40, holding steady after correcting from yesterday's 10-day high at 1.1172. Cable printed a one-week high at 1.3090, in contrast.

    [EUR, USD]
    EUR-USD traded narrowly around 1.1130-40, holding steady after correcting from yesterday's 10-day high at 1.1172. A solid round of U.S. data releases yesterday gave the dollar an underpinning. 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 backed out of its tightening cycle after hiking rates three times last year. The ECB, meanwhile, remains entrench in a policy wait-and-see mode.

    [USD, JPY]
    The yen posted fresh lows once again as risk appetite continue to course through global markets. The MSCI all-country world equity index touched fresh record highs earlier, even though Chinese markets have sputtered somewhat and momentum appears to have waned a little. An above-forecast 6.9% y/y rise in China's industrial production helped maintain the risk-on times, which followed a solid round of U.S. data releases yesterday and some strong corporate earnings results. USD-JPY rallied to a fresh eight-month peak at 110.28, marking the eighth day out of the last 10 where the pairing has gained. Yen crosses also remained firm. CAD-JPY pegged an eight-and-a-half month peak, and while EUR-JPY and AUD-JPY remained off their respective trend highs from yesterday, both are higher on the day. We retain a bullish view 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. The BoJ's next policy meeting is up next week, where a no-change decision is widely anticipated, though the central bank is also expected to lift growth estimates as a consequence of the U.S.-China trade deal and de-escalation in Mideast tensions.

    [GBP, USD]
    Cable printed a one-week high at 1.3090. Sterling has become less volatile in recent sessions after a one-month phase of heightened choppiness following the UK election result and in thin markets over the Christmas and new year holiday period. The UK currency is presently back at levels that were prevailing in early December, ahead of the election, against both the dollar and euro, showing a respective year-to-date decline of 1.3% and 0.7% (as of the early London session today). We are taking a neutral-to-bearish view of the UK currency amid concerns about the durability of any post-election economic bounce, with Brexit issues likely to remain a concern. There is the risk of no-deal Brexit at the end of 2020, and there is a real possibility of a deterioration in the UK's terms of trade for some years once the country leaves the transition period, and there are implementation issues with regard to new post-Brexit systems at the Northern Irish border. The upcoming BoE Monetary Policy Meeting, on January 30, is now a live meeting. The BoE-sensitive 2-year Gilt yield had dropped by nearly 20 bp over the last week. The OIS market is discounting nearly an 60% chance for a 25 bp rate cut at the end of the month, up from about 50-50 odds before sub-forecast inflation data on Tuesday. A rate cut is now fully factored-in by the end of May. The next data of note out of the UK will be December retail sales, out tomorrow. We expect sales to rebound 0.5% (median 07%) in following the 0.6% contraction in November.

    [USD, CHF]
    EUR-CHF lifted back above 1.0750 after yesterday hitting a 33-month low at 1.0732, with the franc having come off the boil after rallying precipitously following the logic-defying decision by the U.S. to add Switzerland to its list of currency manipulators earlier in the week. The U.S. move seems a bit rich given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index). The U.S. argues that Switzerland needs a more expansive fiscal policy. Divergence in the forex markets two principal safe haven currencies, the franc and the yen has been notable. The CHF-JPY cross has been trading at 13-month highs after rallying by almost 5% from levels seen in late November.

    [USD, CAD]
    USD-CAD has remained heavy after printing a five-day low yesterday at 1.3032. Buoyant global stock markets and, more particularly, gains in oil prices after a period of weakness, have given the Canadian dollar an underpinning. More of the same looks likely.

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