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By XE Market Analysis November 12, 2019 3:12 am
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    XE Market Analysis: Europe - Nov 12, 2019

    The yen took a rotation lower during pre-Europe trading in Asia as stock markets steadied after wobbling yesterday. A report in Politico saying that EU officials are expecting President Trump to confirm that he will delay hiking tariffs on EU cars and auto part imports for another six months, according to an EU source, gave investor spirits a boost after the president had said over the weekend that the media had exaggerated U.S. willingness to roll back tariffs on China. Trump is scheduled to speak on trade before the Economic Club of New York today, where markets will be on tenterhooks, looking for confirmation of the EU tariff story and a positive update on the China trade front. This backdrop saw Japan's Nikkei 225 finish up by 0.8%, which is its biggest gain in a week, while the MSCI Asia-Pacific (ex-Japan) index rose 0.5%, after dropping 1.2% yesterday. The yen concomitantly saw the safe-haven positioning of yesterday unwind. USD-JPY lifted from sub-109.0 levels and above yesterday's high in making a peak at 109.29. This swings the five-month high seen last week at 109.48 back into scope. Yen crosses also traded firmer as the Japanese currency weakened. Narrow ranges have been prevailing among the other main dollar pairings and associated cross rates. EUR-USD has been plying a narrow range below 1.1050 and above the one-month low seen last Friday at 1.1016. Cable has drifted moderate lower, correcting some of the gains seen yesterday following news that the Brexit Party won't be challenging existing Conservative Party seats at the December-12 general election, which has boosted the odds of PM Johnson being returned to Parliament with a working majority. AUD-USD hit a two-week low at 0.6832 before rebounding above 0.6850.

    [EUR, USD]
    EUR-USD has been plying a narrow range below 1.1050 and above the one-month low seen last Friday at 1.1016. A report in Politico saying that EU officials are expecting President Trump to confirm that he will delay hiking tariffs on EU cars and auto part imports for another six months, according to an EU source, has the potential to be a positive lead for the euro should Trump confirm this at a speech he is due to make later today on trade and economic policy. 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]
    The yen took a rotation lower during pre-Europe trading in Asia as stock markets steadied after wobbling yesterday. A report in Politico saying that EU officials are expecting President Trump to confirm that he will delay hiking tariffs on EU cars and auto part imports for another six months, according to an EU source, gave investor spirits a boost after the president had said over the weekend that the media had exaggerated U.S. willingness to roll back tariffs on China. Trump is scheduled to speak on trade before the Economic Club of New York today, where markets will be on tenterhooks, looking for confirmation of the EU tariff story and a positive update on the China trade front. This backdrop saw Japan's Nikkei 225 finish up by 0.8%, which is its biggest gain in a week, while the MSCI Asia-Pacific (ex-Japan) index rose 0.5%, after dropping 1.2% yesterday. The yen concomitantly saw the safe-haven positioning of yesterday unwind. USD-JPY lifted from sub-109.0 levels and above yesterday's high in making a peak at 109.29. This swings the five-month high seen last week at 109.48 back into scope. Yen crosses also traded firmer as the Japanese currency weakened. 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 (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 vaulted higher yesterday on Brexit related news, and was showing a near 1% gain on the dollar at the highs while hitting six-month highs in the case against the euro. The catalyst was the Brexit Party deciding not to contest PM Johnson's Conservative Party in the 317 seats they won at the previous general election in 2017. This will greatly reduce the risk of splitting the pro-Brexit vote at the December-12 election. The Brexit Party will instead contend seats held by the Labour party and other pro-EU parties. This is a climbdown for Nigel Farage, the leader of the Brexit Party, who has been been critical of the deal Boris Johnson's reached with the EU, which he thinks will result in the UK being too aligned with EU rules and regulations. Farage's decision came with opinion polls trending in favour of the Conservative Party and away from the Brexit Party since the election was announced. Politico's poll tracker shows the Conservatives now command 39% support, up 3 points over the last two weeks and up from 28% at the time Johnson took over from Teresa May in late July. With the Brexit Party having backed down, the Conservatives are likely to see their lead strengthen, and as things look now, the Conservatives are well positioned to win the election and return to Parliament 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 LibDems, which have a combined support tally of 44%. Tactical pacts between smaller pro-EU parties will also be aiming to counter the pro-Brexit vote.

    [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 fresh one-month peak at 1.3249. 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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