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By XE Market Analysis November 4, 2019 4:31 am
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    XE Market Analysis: Europe - Nov 04, 2019

    A risk-on vibe saw the yen retain a soft tone while the Australian and New Zealand dollars benefited most out of the main currencies, and most developing world currencies posted gains against the dollar and yen. The South African rand rallied most sharply as markets reacted to on relief that Moody's maintained South Africa's investment-grade rating on Friday, although trimming its outlook to "negative". Upbeat mood music continued to flow on the U.S.-China trade front. There are reports that U.S. Commerce Secretary Ross will meet with Chinese Premier Li, while Ross also said over the weekend that the U.S. may not have to impose tariffs on auto imports from the EU following "good conversations". This followed Friday's above-forecast U.S. jobs report and Caixin manufacturing PMI survey out of China, all of which floated the MSCI Asia-Pacific (ex-Japan) equity index to a 14-month high today. This follows fresh record highs being printed by the S&P 500 and NASDAQ on Friday. Yen softness saw USD-JPY lift to within a pip of Friday's high at 108.32 while AUD-JPY breached above its Friday peak in making 74.99. The AUD-JPY cross is up by 3.6% from month-ago levels. Only the pound has outperformed the Aussie over this time period. EUR-USD lifted to within 2 pips of Thursday's two-week high at 1.1175 while EUR-JPY and EUR-GBP and other euro crosses were also buoyant, drawing in on highs seen late last week. Cable settled in a narrow range just below 1.2950 and just above Friday's low at 1.2927. Japanese markets closed today. Regarding U.S.-China trade talks, there is a degree of wariness appearing in market narratives, especially on whether the U.S. will cancel planned December tariffs and remove some of the current tariffs, which is what Beijing has been demanding, while China has been baulking at the level of purchases of U.S. agricultural goods Washington has been demanding.

    [EUR, USD]
    EUR-USD lifted to within 2 pips of Thursday's two-week high at 1.1175 while EUR-JPY and EUR-GBP and other euro crosses were also buoyant, drawing in on highs seen late last week. A no-deal Brexit avoided theme has given both the euro and pound a lift recently, though the possibility for a no-deal further down the track remains on the cards. The ECB is also taking a dovish tilt with Christine Laggard having taken up the reins, though this has been offset by here committed calls to Eurozone leaders for fiscal stimulus. As for the dollar, U.S. fundamentals appear relatively robust following Friday's solid U.S. employment report for October, though much will depend on how U.S.-China and U.S.-EU trade issues work out. Data this week includes the October U.S. services PMI and equivalent ISM non-manufacturing PMI, both of which are expected to show the important service sector improving from month-prior readings and remaining in expansion, with headline readings of 51.0 and 53.4 expected. EUR-USD last week logged the 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. Bigger picture, a sputtering Eurozone economy and a dovish ECB should keep EUR-USD's upside potential in check. We still class the pairing as being amid a bear trend that's been unfolding since early 2018, from levels around 1.2500. The trend has coincided with the 10-year Bund yield dropping from levels over 0.70% to the prevailing -0.350 % yield (a -0.739% low was seen in early September).

    [USD, JPY]
    A risk-on vibe saw the yen retain a soft tone while the Australian and New Zealand dollars benefited most out of the main currencies, and most developing world currencies posted gains against the dollar and yen. Upbeat mood music continued to flow on the U.S.-China trade front. There are reports that U.S. Commerce Secretary Ross will meet with Chinese Premier Li, while Ross also said over the weekend that the U.S. may not have to impose tariffs on auto imports from the EU following "good conversations". This followed Friday's above-forecast U.S. jobs report and Caixin manufacturing PMI survey out of China, all of which floated the MSCI Asia-Pacific (ex-Japan) equity index to a 14-month high today. This follows fresh record highs being printed by the S&P 500 and NASDAQ on Friday. Yen softness saw USD-JPY lift to within a pip of Friday's high at 108.32 while AUD-JPY breached above its Friday peak in making 74.99. The AUD-JPY cross is up by 3.6% from month-ago levels. Only the pound has outperformed the Aussie over this time period. Regarding U.S.-China trade talks, there is a degree of wariness appearing in market narratives, especially on whether the U.S. will cancel planned December tariffs and remove some of the current tariffs, which is what Beijing has been demanding, while China has been baulking at the level of purchases of U.S. agricultural goods Washington has been demanding.

    [GBP, USD]
    The pound racked up another up week last week, making it the fourth week out of the last five where a higher high has been set. From month-ago levels, the pound is the strongest performer out of the main currencies, up 5% against the dollar and by over 6% versus the euro. The gains reflect an unwinding in the pound's Brexit discount, with a Halloween no-deal Brexit scenario having been avoided. We estimate that the broad trade-weighted measure of the pound retains at about a 8-9% discount relative to levels prevailing ahead of the July 2015 Brexit vote, which has been pared back from lows of 15%-plus. The UK now finds itself with Brexit delayed for a second time and once again in a quagmire of political uncertainty, and we don't expect any further significant unwinding in sterling's Brexit 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.

    [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 printed a five-day low at 1.3130, with the Canadian dollar being floated by a backdrop of coursing risk appetite in global markets, similar to the other dollar bloc currencies, which has offset the jump in U.S. yields following the strong U.S. jobs data on Friday. Taking a step back, USD-CAD is near to the midpoint of the range that's been seen over the last four-plus years.

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