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By XE Market Analysis January 20, 2020 3:28 am
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    XE Market Analysis: Europe - Jan 20, 2020

    The dollar has seen modest weakness in quiet early-week trading. Volumes are likely to remain on the low side today with U.S. markets closed for the Martin Luther King holiday. Stock markets in Asian remained buoyant after bellwether indices in the U.S. and Europe hit record highs on Friday. Mostly upbeat earnings, reduced trade uncertainty and, more fundamentally, accommodative central banks (the Fed's capping of repo rates of particular note, which has swelled its balance sheet by 11% since last September) and a persisting benign inflationary picture, have been maintaining the bull run on global stock markets. EUR-USD steadied near 1.1100 after dropping over the last two days of last week, which left a 10-day low at 1.1085. USD-JPY went into narrow-range mode, posting just less than a 15-pip range in Asia through to the open of the London interbank market. Cable edged out a five-day low at 1.2985, and EUR-GBP lifted above its Friday peak in making a high at 0.8456. The possibility of the BoE cutting rates at its MPC meeting this Thursday should keep the pound under pressure. USD-CAD ebbed fractionally lower, to a 1.3055 low, which is near the midway point of the range see over the last week. Oil prices rallied at the opening of trading today, which sent front-month WTI futures to an 11-day high at $59.66. Reports that two large production sites in Libya closed in the face of military blockades (the country is amid a long-running civil war) underpinned prices. Elsewhere, AUD-USD recouped nearly half of the decline seen on Friday in carving out a high at 0.6888. The Aussie dollar on Friday printed a 10-day low at 0.6871. RBA money markets positioning have continued to imply a 56% probability for the RBA trimming the cash rate by 25 bp at its February-4 policy meeting, unchanged since last Thursday.

    [EUR, USD]
    EUR-USD steadied near 1.1100 after dropping over the last two days of last week, which left a 10-day low at 1.1085. Bigger picture, 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 central bank has since been engaged in capping the repo rate, which has seen its balance swell by some 11% since last September. The ECB, meanwhile, remains entrench in a policy wait-and-see mode.

    [USD, JPY]
    USD-JPY went into narrow-range mode today, posting just less than a 15-pip range in Asia through to the open of the London interbank market. The BoJ has started a two-day policy meeting, where no changes are expected in prevailing accommodative settings, though the central bank is expected to lift growth projections in light of the reduction in trade uncertainty and abatement in Mideast tensions. 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.

    [GBP, USD]
    Cable edged out a five-day low at 1.2985, and EUR-GBP lifted above its Friday peak in making a high at 0.8456. The possibility of the BoE cutting rates at its MPC meeting this Thursday should keep the pound under pressure. An unexpected 0.6% m/m contraction in UK retail sales in December data, along with sub-forecast December CPI outcome, of 1.3% y/y, and underwhelming November industrial production and GDP data, have strengthened expectations for the BoE to cut the repo rate by 25 bp as soon as this week's Monetary Policy Committee meeting. Positioning in the OIS markets was, as of late last week, implying a 73% probability for such a move this month, up up from around 25% odds that were being implied the week before. The retail sales figure is particularly disappointing as it incorporated Black Friday sales and the Christmas period, and with monthly sales having been flat or negative since July. We still think the BoE will refrain from cutting rates this month, and instead opt to ratchet up dovish guidance. Policymakers will still be looking to see the full impact that the lifting of Brexit and political fog has has since the election in mid December, especially with the global economy looking to be holding up.

    [USD, CHF]
    EUR-CHF has remained heavy after hitting a 33-month low at 1.0731 on Friday. The franc rallied strongly last week 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 ebbed fractionally lower, to a 1.3055 low, which is near the midway point of the range see over the last week. Oil prices rallied at the opening of trading today, which sent front-month WTI futures to an 11-day high at $59.66. Reports that two large production sites in Libya closed in the face of military blockades (the country is amid a long-running civil war) underpinned prices. This have the Canadian dollar a modest lift. The BoC meets on policy this week, announcing on Wednesday. We expect the central bank to hold rates steady at 1.75%. The Monetary Policy Report will also be published, which will detail the bank's growth and inflation outlook. Our base case remains for no change in rates this year amid a steady outlook from the BoC.

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