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By XE Market Analysis November 15, 2019 4:47 am
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    XE Market Analysis: Europe - Nov 15, 2019

    The dollar and yen have traded softer amid a backdrop of risk-on positioning. The S&P 500 posted yet another record closing high on Wall Street yesterday, and futures of the index are up 0.3% in overnight trading. Most Asian markets have also gained, though Hong Kong and Chinese markets flagged. Signals from the U.S.-China trade front suggest a "phase 1" deal on tariff roll backs could be imminent. White House economic adviser Kudlow said yesterday that there had been "very constructive" talks, while China’s commerce ministry said earlier that "in-depth" discussions were ensuing. China also affirmed that it has ended a near five-year ban on imports of U.S. poultry meat. This backdrop saw the safe-haven premium in the yen unwind, which saw USD-JPY lift back to the 108.50-60 from the 10-day low seen yesterday at 108.24. EUR-JPY and AUD-JPY rose from their respective one-month lows that were seen yesterday. Other yen crosses also took an upward rotation. The narrow trade-weighted USD index (DXY), meanwhile, remained heavy after clawing out an eight-day low late yesterday. Dollar weakness helped lift EUR-USD to a three-day high, earlier, at 1.1029. The pair yesterday printed a one-month low at 1.0989. The Australian and Canadian dollar rebounded some after recent underperformance. AUD-USD lifted to the upper 0.6700s, putting in a little space from the one-month low see yesterday at 0.6769, while USD-CAD dipped to a three-day low at 1.3219.

    [EUR, USD]
    Dollar weakness helped lift EUR-USD to a three-day high, earlier, at 1.1029. The pair yesterday printed a one-month low at 1.0989. We retain a neutral-to-bearish view of EUR-USD on the view that the U.S. economy is outpacing the Eurozone economy, albeit with both on a slowing trajectory. 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 has traded softer amid a backdrop of risk-on positioning. USD-JPY lift back to the 108.50-60 from the 10-day low seen yesterday at 108.24. EUR-JPY and AUD-JPY rose from their respective one-month lows that were seen yesterday. Other yen crosses also took an upward rotation. The S&P 500 posted yet another record closing high on Wall Street yesterday, and futures of the index are up 0.3% in overnight trading. Most Asian markets have also gained, though Hong Kong and Chinese markets flagged. Signals from the U.S.-China trade front suggest a "phase 1" deal on tariff roll backs could be imminent. White House economic adviser Kudlow said yesterday that there had been "very constructive" talks, while China’s commerce ministry said earlier that "in-depth" discussions were ensuing. China also affirmed that it has ended a near five-year ban on imports of U.S. poultry meat. 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 continued to hold steady-to-firm against most of the other main currencies. Yesterday the UK currency hit a five-month high versus the euro. Sub-forecast retail sales data out of the UK was the latest data point to show the UK economy in sluggish form, though the same can be said for the eurozone and other global economies. The pound continues to trade with about a 8-9% discount in broad trade-weighted terms since the UK's vote to leave the EU in June 2016. A 15%-plus discount was being registered at the major trend lows seen in mid August when markets were in a state of angst with regard to what had then been looking likely a real possibility that the UK would leave the EU on October 31 in a disorderly fashion without a deal on divorcing terms or a framework for a new trading relationship with the EU. Focus is currently on political campaigning in the UK into the December-12 general election. Politico's poll tracker shows the Conservatives 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 decided not to contest seats that the Conservatives already occupy, their lead looks to have strengthened, 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 45%, which is up a point this week. 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 is set for its biggest down week since the first week of August. The cross yesterday hit a six-week low at 1.0863, since rebounding to the lower 1.0900s but still remaining down by almost 1% from week-ago levels. USD-CHF is showing a similar magnitude of decline over this period. 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 yesterday hit one-month lows, and EUR-GBP a five-month nadir. 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 its first down day in over a week, today retreating to a three-day low at 1.3219. This puts in some space from the five-month peak seen yesterday at 1.3268. The correction has pared the week-on-week gain to just over 0.5%, at levels prevailing in the early London session. Yield differentials have continued to move in the U.S. dollar's favour, however, with the 10-year T-note versus the Canadian benchmark spread now down by about 10 bp from week-ago levels. This follows Canada's October employment report last Friday, which disappointed and caused a reappraisal in BoC monetary policy expectations. 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.

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