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By XE Market Analysis January 22, 2020 3:32 am
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    XE Market Analysis: Europe - Jan 22, 2020

    The dollar has traded steady-to-firmer amid a revival in risk appetite in global markets, brought about by the swift and transparent response of China to the coronavirus outbreak. Some market commentaries have been highlighting this contrasts to Beijing's initial cover-up of the SARS outbreak back in 2003. This underpinned stock markets in Asia while pushing the yen and Swiss franc lower as safe-haven premiums unwound in global markets. USD-JPY recouped some three quarters of yesterday's decline in posting an intraday high at 110.10, swinging the eight-month peak seen last Friday at 110-28 back into scope. USD-CHF and EUR-CHF printed respective five- and eight-day highs. An anomaly amid the risk-back-on theme has been a continued underperformance in the Australian dollar, which posted a six-week low against the U.S. dollar, at 0.6827, in what is now the fourth day where the Aussie has seen lower lows. The double whammy of wildfires and expectations for much lower than normal Chinese tourists over the upcoming Lunar New Year holiday period (due to the virus) have been negatively affecting the Australian dollar. Positioning in ASX interbank cash rate futures are implying 58% odds for the RBA to cut interest rates by 25 bp at its February-4 policy meeting, up from the 55% odds being discounted at the end of last week. The narrow trade-weighted USD index (DXY), meanwhile, has lifted moderately, posting a two-day high at 97.68, which is just 5 pips shy of the four-week peak seen on Monday. EUR-USD concurrently edged out a four-week low at 1.1075. The pound has been plying narrow ranges versus the dollar into the BoE's policy decision next week, after rallying by about 0.5% yesterday following an above-forecast UK labour report. Against the euro, the UK currency still managed to edge out a 12-day high. Markets have been de-scaling expectations for the BoE to cut rates as soon as this montn. Elsewhere, weaker oil prices aided USD-CAD to a two-week high at 1.3092.

    [EUR, USD]
    EUR-USD concurrently edged out a four-week low at 1.1075. This came with the narrow trade-weighted USD index (DXY) lifting moderately and posting a two-day high at 97.68, which is just 5 pips shy of the four-week peak seen on Monday. Bigger picture, the pair 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 entrenched in a policy wait-and-see mode.

    [USD, JPY]
    The yen has traded lower as safe-haven premiums unwound in global markets today, brought about by the swift and transparent response of China to the coronavirus outbreak. Some market commentaries have been highlighting this contrasts to Beijing's initial cover-up of the SARS outbreak back in 2003. This underpinned stock markets in Asia. Amid this backdrop, USD-JPY recouped some three quarters of yesterday's decline in posting an intraday high at 110.10, swinging the eight-month peak seen last Friday at 110-28 back into scope.

    [GBP, USD]
    The pound has been plying narrow ranges versus the dollar into the BoE's policy next week (January 30) after rallying by about 0.5% yesterday following an above-forecast UK labour report. Against the euro, the UK currency still managed to edge out a 12-day high. Markets have been de-scaling expectations for the BoE to cut rates as soon as next week. We think the BoE will refrain from cutting rates at this juncture, 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, and with the government set to pursue a more expansive fiscal policy. Next UK data of note will be the flash January PMI survey, on Friday, after the BoE decision, which we expect to show a rise in the composite headline, to 50.5, from December's 49.5 reading. This matches the consensus forecast. Note that the latest week CFTC data shows the longest net long positioning in sterling futures by speculative accounts since April 2018, which seems to reflect expectations for there being a post-election lift in economic activity in the UK.

    [USD, CHF]
    USD-CHF and EUR-CHF printed respective seven- and eight-day highs, at 1.0760 and 0.9704, reflecting a broader unwinding of safe haven premiums in global markets, with Chinese and Asian stock markets rebounding as Chinese Beijing and regional governments act quickly to stem contagion of the coronavirus outbreak. 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.

    [USD, CAD]
    USD-CAD rallied to a two-week high at 1.3092 on the back of a firmer U.S. currency and softer oil prices. Regarding crude, front-month WTI futures dove over 3% from Monday's high in printing a six-day low yesterday at $57.72. Crude prices have since remained heavy, although above this low. Concerns about the oil supply outage in Libya having abated. The BoC meets on policy today. 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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