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By XE Market Analysis November 11, 2019 4:11 am
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    XE Market Analysis: Europe - Nov 11, 2019

    The yen has firmed up as risk aversion took a grip on markets in Asia as protests and the police response went next level amid reports that one protestor had been shot and killed. President Trump also said on Saturday that while trade talks with China were moving along "very nicely," the U.S. would only make a deal with China if it was right for America while saying that reporting about U.S. willingness to lift tariffs had been exaggerated by the media. Data also showed Chinese producer prices contracting at their fastest pace in over three years in October, reflecting weakness in the manufacturing sector. The mix of trade concerns and the perpetuating crisis in Hong Kong, with the latter fanning narratives that the situation could start having a significant economic impact and threaten Hong Kong's role as a major hub for international finance, made for a resistive sentiment in Asian markets. Stock markets across the region turned lower, although Australia's ASX 200 was an exception as it closed with a 0.7% gain. USD-JPY and most yen crosses dropped below their respective Friday lows as the Japanese currency picked up safe-haven bid. USD-JPY posted a low at 108.91 while EUR-JPY fell to a 26-day nadir at 120.07. Elsewhere, EUR-USD held a narrow range just above the one-month low see on Friday at 1.1016. AUD-USD remained heavy after posting a two-week low on Friday at 0.6847. Sterling posted modest gains after underpeforming last week, despite Moody's having lowered the UK's credit outlook to negative, saying Brexit "paralysis" has made policymaking less predictable.

    [EUR, USD]
    EUR-USD held a narrow range just above the one-month low see on Friday at 1.1016. The euro has been under pressure over the last week. EUR-USD fell by over 1% last week, while EUR-CHF and EUR-GBP forayed into three-week low terrain. The common currency also saw an eight-week nadir against the Australian dollar last Thursday. EUR-USD's price action, which produced a "bearish engulfing" week last week on the charts, has wrong-footed a number of bank analysts. JPMorgan, for instance, had been "exploring opportunities" to go long the euro versus the dollar having been encouraged by the Eurozone posting a record annual surplus on its basic balance (a measure that includes current account, net equity and net foreign direct investment flows), although in JPM's defence they had said this view was a cautious one due to relative weakness in the Eurozone economy. The heaviness in the euro has also persisted after data showed that the German economy, particularly its stricken manufacturing sector, looks to have steadied. The problem is that the U.S. economy is outpacing the Eurozone economy, which was brought into sharp focus by data over the last week or so (the solid U.S. October jobs report, an expansion in October non-manufacturing and unexpectedly tight initial claims data). The EU also offers the biggest concentration of negative-yielding debt, contrasting to U.S. Treasuries, which provides the world's biggest and most liquid pool of risk-free assets (with positive yields to boot). EUR-USD has been amid a bear trend that's been unfolding since early 2018, from levels around 1.2500. The trend has coincided with the 10-year T-note versus 10-year Bund yield differential having narrowed from 278 bps to the current 218 bps. We expect the trend to persist.

    [USD, JPY]
    USD-JPY and most yen crosses dropped below their respective Friday lows as the Japanese currency picked up safe-haven bid. USD-JPY posted a low at 108.91 while EUR-JPY fell to a 26-day nadir at 120.07. Risk aversion took a grip on markets in Asia as protests and the police response went next level amid reports that one protestor had been shot and killed. President Trump also said on Saturday that the U.S. would only make a deal with China if it was right for America while saying that reporting about U.S. willingness to lift tariffs had been exaggerated by the media. Data also showed Chinese producer prices contracting at their fastest pace in over three years in October, reflecting weakness in the manufacturing sector. The biggest directional driver of the yen is likely to remain the ebb and flow of risk appetite in global markets (there is causation behind this correlation), and so developments on the U.S.-Chine trade front will be front and centre. Assuming the "phase 1" deal comes to fruition, and with the U.S. economy enjoying what looks like a goldilocks economy -- growth slower, but still holding up, and inflation remaining benign -- then more upside will likely be seen in USD-JPY. In Japan, "Abenomics" has been getting a dusting down. Japanese PM Abe last week pledged a renewed push of fiscal stimulus, while BoJ Governor Kuroda had earlier in the week reaffirmed the central bank's commitment to monetary easing to achieve its 2% inflation target, though he admitted "it's taking time." Regarding Japan's disinflation quagmire, there is a theory that QE, or QQE with yield curve control in Japan's case, is backfiring in the sense that it fosters excess capacity, thereby generating deflationary forces.

    [GBP, USD]
    The pound has gone directionless after a recent phase of pronounced outperformance. From early-October levels, Her Majesty's currency is showing a rise of over 5% against the dollar and of more than 6.5% versus the yen, reflecting an unwinding in the pound's Brexit discount, with a Halloween no-deal Brexit scenario having been avoided last week. We estimate that the broad trade-weighted measure of the pound retains at about a 9% discount relative to levels prevailing ahead of the July 2016 Brexit vote, which has been pared back from lows of 15%-plus that were seen in mid August. The BoE left monetary policy settings unchanged at the conclusion of its November policy meeting yesterday. The two dissenters favouring a 25 bps rate cut wasn't, or shouldn't have been, much of a surprise, nor was the modest trimming in GDP and CPI projections. The MPC minutes also showed some positivity, noting that some of the uncertainty facing UK businesses and households has been removed by recent Brexit developments, while noting that UK fiscal policy is set to become easier in 2020 (as being pledged by the main parties going into the December-12 general election), and that it expects there to be a modest improvement in global growth next year, although stressing that risks remain to the downside. Governor Carney during his press conference went through the risks on the global front -- the sustainability of global supply chains as trade protectionism becomes more pervasive etc -- but concluded by saying that "on balance we think the economy is stabilizing." Overall, much of the BoE's messaging was pretty predictable, and was not a bearish inflection point for the pound. Focus now shifts back to the upcoming election. Campaigning officially commenced this week. As things stand, PM Johnson's Conservative Party is retaining a commanding lead in opinion polling that suggests they could win and be returned to government with a majority. That in turn implies Brexit being implemented in January. The main threat to Johnson is a possible coalition between Labour and the LibDen, and possibly Scotland's SNP, in addition to tactical pacts between smaller pro-EU parties.

    [USD, CHF]
    EUR-CHF has seen some choppy trading in recent sessions, but with an overall downside bias, despite the abatement in no-deal Brexit risk and the recent blast of risk-on positioning in global markets.

    [USD, CAD]
    USD-CAD is likely to remain buoyant following the disappointing October jobs report out of Canada and with investors harbouring concerns about whether U.S.-China can even reach an agreement on the partial "phase 1" deal. The pairing hit a four-week peak at 1.3236 on Friday and has since remained underpinned. USD-CAD had earlier last week printed a one-week low at 1.3015 before rebounding. Taking a couple of steps back, the pair is near to the midpoint of the range that's been seen over the last four-plus years, and there presently doesn't look to be much potential for this pattern to break.

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