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By XE Market Analysis November 13, 2019 4:14 am
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    XE Market Analysis: Europe - Nov 13, 2019

    The New Zealand dollar surged by over 1% against the dollar and other currencies after the RBNZ surprised markets by refraining from cutting interest rates following its policy meeting today. NZ money market futures had been implying odds of 75% for the central bank to cut the benchmark rate to a new record low of 0.75%, which was instead left at 1.00%. The central bank said that after two cuts this year there was no urgency to cut again. NZD-USD belted up from levels near 0.6330 to an eight-day high of 0.6418, while AUD-NZD plummeted to three-week lows. Ranges among the other main currencies have been comparatively narrow, though not without some movement amid a risk-cautious sentiment in markets after President Trump disappointed expectations at his speech at the Economic Club of New York yesterday, leaving markets with a sense that the U.S. and China are continuing to struggle to finalized their partial "phase 1" deal. USD-JPY lifted to the lower 109.0s after printing a six-day low during the early part of Tokyo trading, at 108.87. EUR-JPY similarly rose after hitting a one-month low, at 119.86, as did AUD-JPY, after the cross saw a 12-day low. The lows reflected safe-haven positioning into the yen. EUR-USD settled to narrow range trading in the lower 1.1000s, above the one-month seen just ahead of the London interbank closing yesterday at 1.1002. USD-CAD has remained buoyant after posting a one-month peak at 1.3257 yesterday. The high extended the pronounced gains the pairing has seen since the release of Canada's October employment report last Friday, which disappointed and caused a reappraisal in BoC monetary policy expectations. AUD-USD edged out a 16-day low, at 0.6830. The pound continued to hold comparatively steady.

    [EUR, USD]
    EUR-USD remains heavy after posting a one-month seen just ahead of the London interbank closing yesterday, at 1.1002. We expect further losses with the dollar trending firmer and the common currency lower. EUR-CHF has hit a fresh one-month low today, and EUR-GBP is pressing on five-month lows. EUR-JPY has also descended into one-month low terrain. We retain a bearish view of EUR-USD, hinged on the fact is that the U.S. economy is outpacing the Eurozone economy, which was brought into sharp focus by data over the last couple of weeks (the solid U.S. October jobs report, an expansion in October non-manufacturing and unexpectedly tight initial claims data). The EU also has the biggest concentration of negative-yielding debt in the world, 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 printed new highs amid a risk-cautious sentiment in markets after President Trump disappointed expectations at his speech at the Economic Club of New York yesterday, leaving markets with a sense that the U.S. and China are continuing to struggle to finalized their partial "phase 1" deal. USD-JPY lifted posted a six-day low during the early part of Tokyo trading, at 108.87. EUR-JPY hit a one-month low, at 119.86, and AUD-JPY a 12-day nadir. The lows reflected safe-haven positioning into the yen. 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 (eventually) 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 has settled after rotating higher on Monday on news that the Brexit Party decided 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 they now look 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 currently 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 dropped for a third consecutive day, producing a one-month low of 1.0896, which is a culmination of an accelerating two-week descent from levels above 1.0050. A combo of broader euro losses and franc outperformaance have been at play. EUR-USD has hit one-month lows, and EUR-GBP is pressing at five-month lows, while USD-CHF is down for a third straight day, and AUD-CHF, among other franc crosses, have also come under pressure. A combo of euro bearishness and risk-off positioning has been pressing EUR-CHF lower. The two-and-a-half-year low seen in early September at 1.0811 provides a downside reference point.

    [USD, CAD]
    USD-CAD has remained buoyant after posting a one-month peak at 1.3257 yesterday. The high extended the pronounced gains the pairing has seen since the release of Canada's October employment report last Friday, which disappointed and caused a reappraisal in BoC monetary policy expectations. The 10-year U.S. T-note yield advantage over the 10-year Canadian benchmark has widened by over 6 bps since the data release. At the same time, oil prices have turned flat-to-softer following a one-month up phase. For now, USD-CAD looks likely to remain upwardly biased.

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