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By XE Market Analysis November 1, 2019 4:55 am
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    XE Market Analysis: Europe - Nov 01, 2019

    The dollar has traded softer, which has pushed the narrow trade-weighted USD index (DXY) to an 11-day low at 97.20. Yesterday's across-the-curve ebb in U.S. Treasury yields and recession-narrative fitting weak Chicago PMI data have weighed on the U.S. currency. Unexpected strength in China's Caixin manufacturing PMI data restored some risk appetite in Asian stock markets today, after a weak close on Wall Street yesterday, and gave the likes of the yen and Australian dollar a modest lift, too. USD-JPY ebbed to a three-week low at 107.88, extending the decline from Wednesday's three-month high at 109.28 and setting up the pairing for the first weekly decline in four weeks (a close out in New York today below 108.42-44 is needed to achieve this). EUR-JPY, AUD-JPY and most other yen crosses managed to hold above their respective lows of yesterday, however. EUR-USD saw a modest upward drift but remained in an overall narrow range in the mid 1.1100s, and below the 11-day peak seen yesterday at 1.1175. Cable lifted about 50 pips in making a 1.2968, though left yesterday's 10-day peak at 1.2975 unchallenged. The U.S. currency also saw modest weakness against the dollar bloc currencies, with AUD-USD, for instance, lifting by about 25 pips to an intraday high at 0.6910. Data showed China's Caixin manufacturing PMI for October rising to a near three-year-high of 51.7 in what is now the fourth consecutive month of improvement, driven by a rise in export orders despite the prevailing trade issues with the U.S. In contrast, Japan's October manufacturing PMI to have slumped to a three-year-plus low reading of 48.4, reflecting in part the double whammy impact of a sales tax increase and a typhoon. Focus now shifts to today's release of the U.S. October jobs report.

    [EUR, USD]
    EUR-USD saw a modest upward drift but remained in an overall narrow range in the mid 1.1100s, and below the 11-day peak seen yesterday at 1.1175. The high was a product of dollar weakness following an across-the-curve ebb in U.S. Treasury yields yesterday, and recession-narrative fitting Chicago PMI data. With the Eurozone calendar quiet today, focus now fully falls on the upcoming release of the U.S. October employment report, although distortions from the UAW strike will mar its usefulness. We expect non-farm payrolls to rise 95k (versus the median for 89k), though constrained by a direct subtraction of 49k UAW workers, along with some additional weakness (we estimate -10k) from indirect hits to GM suppliers. Hourly earnings are seen rising 0.3% versus unchanged in September, with the unemployment rate steady at 3.5%. Also up is the October manufacturing ISM, which likely improved to 49.0 from 47.8. September, and construction spending, which is penciled in with a 0.3% increase after edging up 0.1% previously. The data come with risks skewed more to the downside than the upside, with the prevailing market mood apt to selling dollars on any readings much below the consensus forecasts. EUR-USD looks set to make this fourth up week out of the last five weeks, which has in large part reflected broader euro buoyancy as the risk of a no-deal Brexit peeled away (though this spectre remains a risks further down the road). Bigger picture, a sputtering Eurozone economy and a dovish ECB should keep EUR-USD's upside potential in check.

    [USD, JPY]
    USD-JPY ebbed to a three-week low at 107.88, extending the decline from Wednesday's three-month high at 109.28 and setting up the pairing for the first weekly decline in four weeks (a close out in New York today below 108.42-44 is needed to achieve this). EUR-JPY, AUD-JPY and most other yen crosses managed to hold above their respective lows of yesterday, however. Data showed Japan's October manufacturing PMI to have slumped to a three-year-plus low reading of 48.4, reflecting in part the double whammy impact of a sales tax increase and a typhoon. In contrast, China's Caixin manufacturing PMI for October rising to a near three-year-high of 51.7 in what is now the fourth consecutive month of improvement, driven by a rise in export orders despite the prevailing trade issues with the U.S. There seems potential in the air for fresh bout of risk aversion in global markets, with U.S.-China trade talks looking to have reached a sticking point, and with incoming data showing the U.S. economy losing momentum, which could lead to haven demand for the yen.

    [GBP, USD]
    The pound is showing an averaged gain of 0.7% against the dollar, euro and yen over the last week, reflecting relief that the UK avoided a no-deal Brexit was avoided at the prior October-31 deadline.The pound remains up by over 8% from the major trend lows seen against the dollar in early September, with about two thirds of this having reflected an unwinding in the Brexit discount the market has been demanding (calculated from the broad trade-weighted, inflation adjusted measure of sterling from levels seen just ahead of the 2016 EU referendum to current levels). We don't expect any further significant unwinding in this discount as all options remain open with regard to how Brexit is resolved -- ranging from no deal to Brexit cancelled, depending on the results of the December-12 general election and any referendum after the election -- and with the combined Conservative and Brexit parties support in Politicos poll track now taking at 48%, having ticked 2 points higher over the last week.

    [USD, CHF]
    EUR-CHF has been lifted recently by the diminishing in no-deal Brexit risks, which has been supportive of the euro. The cross has printed a two-and-a-half-month high at 1.1059.

    [USD, CAD]
    USD-CAD is set to post its first up week out of the last four weeks. This comes with oil prices having dropped by over 4% from week-ago levels and with the BoC managing to out-dove the Fed at their respective monetary policy reviews this week. Canada's central bank opened the door wide to a near term rate cut while delivering the as-expected steady rate announcement. The BoC observed that Canada has not been immune to the developments globally. USD-CAD printed a two-week high at 1.3208 before settling in the mid 1.3100s. The pair remains up by about 1% from the three-month low seen earlier in the week at 1.3042.

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