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By XE Market Analysis November 18, 2019 4:20 am
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    XE Market Analysis: Europe - Nov 18, 2019

    Sterling has rallied on weekend polls showing PM Johnson's Conservative Party having extended its lead in opinion polls. This strengthens the odds for the party to win the December-12 election and be returned to Parliament with a working majority, which in turn suggests that the Brexit deal on the table will be implemented in January, when the UK will then enter a transition phase through to the end of 2020. The pound rose by nearly 0.5% in making a 17-day high versus the dollar at 1.2955. The UK currency also posted a new five-month high against the euro. Politicos poll tracker now indicates the Conservatives with 41% support, up 2 points from Friday, with second-spot Labour some way behind with 29%. The euro lifted on the coattails of the pound. EUR-USD printed an 11-day peak at 1.1067, while EUR-JPY and EUR-CHF both posted six-day highs. Both the dollar and the yen, meanwhile, ebbed against most other currencies amid a risk-on backdrop. The three main U.S. equity indices all scaled new record highs on Friday, and S&P 500 futures are showing a 0.2% gain in overnight trading. Most Asian markets have lifted. The PBoC surprised by trimming seven-day reverse repurchase agreements by 5 bp to 2.50%, while state median in China said over the weekend that it had "constructive talks" with the U.S. on trade in a high-level phone call. This was a fresh indication that there is more momentum and serious intent than in previous rounds of talks. Highlights from the week ahead include the release of the Fed FOMC minutes (Wednesday), the first speech by new ECB president, Lagarde, on Friday, prelim November PMI data out of the Eurozone (Friday), and various trade reports out of Asia. We retain a bullish view on the dollar, expecting both the Fed's minutes and U.S. data to overall maintain the view of the Fed being on hold now with the economy in a "good place."

    [EUR, USD]
    The euro lifted on the coattails of a rally in the pound following polling showing PM Johnson has extended his lead in opinion polls ahead of the December-21 general election in the UK. EUR-USD printed an 11-day peak at 1.1067, while EUR-JPY and EUR-CHF both posted six-day highs, though pound outperformance drove EUR-GBP to a new five-month low. We still 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 positive-yielding risk-free assets. 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 bps.

    [USD, JPY]
    The yen has remained on a softening tack against most other currencies amid a risk-on backdrop. The three main U.S. equity indices all scaled new record highs on Friday, and S&P 500 futures are showing a 0.2% gain in overnight trading. Most Asian markets have lifted. The PBoC surprised by trimming seven-day reverse repurchase agreements by 5 bp to 2.50%, while state median in China said over the weekend that it had "constructive talks" with the U.S. on trade in a high-level phone call. This was a fresh indication that there is more momentum and serious intent than in previous rounds of talks. The biggest directional driver of the yen will 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 earlier in the month pledging 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]
    Sterling has rallied on weekend polls showing PM Johnson's Conservative Party having extended its lead in opinion polls. This strengthens the odds for the party to win the December-12 election and be returned to Parliament with a working majority, which in turn suggests that the Brexit deal on the table will be implemented in January, when the UK will then enter a transition phase through to the end of 2020. The pound rose by nearly 0.5% in making a 17-day high versus the dollar at 1.2955. The UK currency also posted a new five-month high against the euro. Politicos poll tracker now indicates the Conservatives with 41% support, up 2 points from Friday, with second-spot Labour some way behind with 29%. The currency's gains are rooted in the markets view that Brexit will be delivered, but with a full transition period (which is likely to be extended for two years beyond the end of 2020). The risk for a no-deal Brexit scenario is now seen as much reduced as a consequence of the Brexit Party decision to not contest Tory-held seats at the election. This was a big back down for Nigel Farage's party, and came as opinion polls shifted toward the Conservatives and away from the Brexit Party.

    [USD, CHF]
    EUR-CHF has rebounded back above 1.0950 after printing a six-week low last Thursday at 1.0863. The euro was lifted by Brexit news, while a risk-on backdrop has also been conducive for weakening the Swiss franc. The two-and-a-half-year low seen in early September at 1.0811 has now swung back out of scope, for now.

    [USD, CAD]
    USD-CAD has nudged to a 10-day low at 1.3209 in what is now a third consecutive day of decline. This puts in some space from the five-month peak seen last week at 1.3270. The Canadian dollar's bid comes with oil prices hitting fresh highs, with the front-month future of the WTI benchmark posting a near two-month peak at $58.16. A risk-on mood is prevailing, which has supported the dollar-bloc currencies, offsetting the recent dovish turn at the BoC in the case of Canada's currency. Canada's data release highlights this week include CPI, retail sales and manufacturing, which will scrutinized in light of the BoC's bias to cutting rates as soon as its December policy meeting.

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