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By XE Market Analysis November 14, 2019 3:45 am
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    XE Market Analysis: Europe - Nov 14, 2019

    Both the dollar and yen have continued to hold firm against most other currencies amid a backdrop of sputtering global stock markets. The Australian dollar dove following the release of Australia's October employment report, which showed the unemployment rate ticking higher, to 5.3% from 5.2%. China's industrial production growth also slowed sharply in October, to 4.7% y/y verses the median forecast for 5.4% growth, with investment growth falling to a record low. Chinese sales also underwhelmed, while preliminary Japanese Q3 GDP disappointed with growth of just 0.1% q/q, with a 0.7% q/q drop in exports shining a light on the impact of trade protectionism. On a brighter note, German Q3 GDP came in at 0.1% versus the 0.0% median forecast, though Q2 growth was revised lower. The data still helped the euro lift moderately. EUR-USD climbed back above 1.1000 after earlier carving out a fresh one-month low at 1.0994. The yen remained underpinned by safe-haven positioning, albeit moderate. USD-JPY printed a nine-day low at 108.62, while both EUR-JPY and AUD-JPY hit new one-month lows, with both now amid a fifth consecutive day of decline. The Australian dollar dove by over 0.5%, driving AUD-USD to a one-month low at 0.6795, and the AUD-NZD cross to a 10-week low, at 1.0625. The cross has declined by nearly 2% since the RBNZ unexpectedly refrained from cutting interest rates yesterday. Cable drifted the the lower 1.2800s from levels above 1.2850, but has so far remained above the low seen yesterday at 1.2822. Asian equities have been mixed today, with the main indices in Japan and Hong Kong down, China flat while Australian and South Korean markets managed to rally. S&P 500 futures are showing a 0.2% decline after the regular cash version of the index closed on Wall Street yesterday with only a fractional net gain. Of note, a new Reuters poll found that most economists are not expecting the U.S. and China reach a permanent trade deal over the coming year.

    [EUR, USD]
    EUR-USD clawed back above 1.1000 after earlier carving out a fresh one-month low at 1.0994. German Q3 GDP came in at 0.1% versus the 0.0% median forecast, though Q2 growth was revised lower. The data still helped the euro, which has been underperforming most other currencies over the last week, lift moderately. We retain a neutral-to-bearish view of EUR-USD, hinging the U.S. economy is outpacing the Eurozone economy. Then there is the fact that 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 217-8 bps.

    [USD, JPY]
    The yen remained underpinned by safe-haven positioning, albeit moderate. USD-JPY printed a nine-day low at 108.62, while both EUR-JPY and AUD-JPY hit new one-month lows, with both now amid a fifth consecutive day of decline. Global stock markets have remained in sputtering mode and data out of Asia today was negative. China's industrial production growth also slowed sharply in October, to 4.7% y/y verses the median forecast for 5.4% growth, with investment growth falling to a record low. Chinese sales also underwhelmed, while preliminary Japanese Q3 GDP disappointed with growth of just 0.1% q/q, with a 0.7% q/q drop in exports shining a light on the impact of trade protectionism. Australia's October employment report also showed that unemployment rate ticking higher, to 5.3% from 5.2%, while the underemployed measure also rose. 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 would 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 that "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 been trading mixed, holding steady against the dollar and yen while gaining on the euro and other currencies. Notably, the UK currency has ascended to five-month highs against the euro, which has been underperforming over the last week. Sterling markets were unperturbed by the CPI miss yesterday, with both UK yields and the pound reversing at least most of the declines seen in the immediate wake of the data release. UK October CPI, to recap, missed, at 1.5% y/y, the lowest rate seen since November 2016 and follows 1.7% in September. The median forecast had been for a decline to 1.6%. The BoE forecast in its November Inflation Report that CPI would dip to a base of 1.2% in Q2 2020, so the weakness in the October figure won't be much of a surprise to policymakers. Focus remains on political campaigning in the UK into the December-12 general election. 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. Bigger picture, Brexit delivered, as is looking likely, may start a process towards a devolution of the UK. Pro-EU Scotland would likely stage a second independence referendum, and even Northern Ireland (which is also pro-EU) may be at the beginnings of a course for unification with the Republic of Ireland.

    [USD, CHF]
    EUR-CHF has matched the five-week low seen yesterday at 1.0878. USD-CHF has also come under notably pressure in recent sessions, which has driven the pairing to nine-day lows. The low in EUR-CHF 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 what is a fourth straight day now, 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 is amid a third consecutive week of ascent, and has remained buoyant after printing a five-month peak at 1.3268 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 5 bps since the data release. At the same time, oil prices have turned flat-to-softer following a one-month up phase, removing what had been a supportive rug from under the Canadian dollar's feet. For now, USD-CAD looks likely to remain upwardly biased.

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