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By XE Market Analysis November 19, 2019 3:52 am
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    XE Market Analysis: Europe - Nov 19, 2019

    The dollar has remained heavy against most of the other main currencies, although above the lows seen yesterday after CNBC reported that Beijing is pessimistic about reaching a deal with the U.S. One exception was the Australian dollar, with AUD-USD posting a four-day low at 0.6774 after the minutes to the RBA's early November meeting that it "agreed a case could be made" for another cut in the 0.75% cash rate given unwelcome weakness in wages growth and inflation. Helping mollify market anxieties about the evidently difficult talks between the U.S. and China in reaching the long-since tabled "phase 1", which only aims to rolls back existing and announced tariffs, was news the Trump administration granted an extension for U.S. companies to do business with blacklisted Chinese telecoms group Huawei, along with news that Japan passed a limited trade deal with the U.S. (albeit leaving auto tariffs still in question). This wasn't enough to prevent the yuan ebbing to a two-week low versus the dollar, with USD-CNY rising to 7.0295 in the onshore market. Elsewhere, the narrow trade-weighted USD index (DXY) settled in a narrow range after declining for three consecutive trading days through to yesterday. The index hit a two-week low yesterday at 97.68, and was sitting at 97.83 in early London trading today. EUR-USD concurrently settled around 1.1065 after yesterday printing a 12-day high at 1.1090. USD-JPY dipped under Monday's low in making a nadir at 108.46. Sterling settled a little off the respective four-week and six-month highs it saw against the dollar and euro yesterday.

    [EUR, USD]
    EUR-USD settled around 1.1065 after yesterday printing a 12-day high at 1.1090. The high was a product of dollar weakness on a news report that the Beijing is having doubts about whether a deal on trade can be reached with the U.S. EUR-USD would need to reach the finish line on Friday above 1.1050-51 to rack up a second consecutive week of advance. The pairing has been chopping around 1.050 since early August, ranging from 1.0879 to 1.1179 over this period. The low marked a two-and-a-half year trough, the culmination of a bear trend that's been unfolding since early 2018, from levels around 1.2500. Momentum of this trend has been waning with the Fed having cut interest rates three times since late July, though markets have now priced out further Fed easing. The CME's FedWatch tool now shows a 2.2% odds are being factored for a 25 bp hike at the December FOMC, having shifted from odds of over 20% for a rate cut at this meeting that were being factored before the release of the unexpectedly robust October employment report (released on November 1). The Fed's measure of the dollar's broad trade-weighted dollar is at near three-year highs. A continuation of dollar firmness would likely keep EUR-USD's overall bias to the downside. Both incoming U.S. data and the Fed minutes on Wednesday are likely to bolster the Fed on hold view.

    [USD, JPY]
    The yen pared recent losses after CNBC reported yesterday that Beijing is pessimistic about reaching a deal with the U.S. USD-JPY dipped under Monday's low in making a nadir at 108.46. Yen crosses also ebbed, especially AUD-JPY after the release of the RBA minutes showed policymakers having considered a fourth rate cut of the year. 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 reaffirmed the central bank's commitment to monetary easing to achieve its 2% inflation target (he admitted that "it's taking time").

    [GBP, USD]
    Sterling has unwound some of its Brexit-related discount, with opinion polls continuing to trend in favour of PM Johnson's Conservative party. Politico's poll track now shows the Conservatives with 41% support, up from 39% on Friday and up from 28% at the point Johnson become PM in July. Labour in in second spot, but some way behind with 29% support. This has gone down well in markets as there seems to be a modicum of clarity about the UK's future breaking out after an extended period of being heavily clouded. The prospect of a rudderless hung parliament and second referendums are looking more remote now. With the Brexit Party having backed down from its threat to split the pro-Brexit vote, it is now widely understood that Johnson's party doesn't harbour any serious desire to pull off a no-deal Brexit, and that it would implement the Brexit deal on the table in January should they return to Parliament with a working majority. This would put the UK in a transition period through to the end of 2020, during which time virtually nothing would change in practical terms as the UK would remain in the single market and customs union, albeit without a vote in the EU. The BoE's trade-weighted measure of the pound is still showing a decline of around 9% from levels prevailing ahead of the vote to leave the EU in July 2016, though having pared this discount, which can be dubbed the Brexit discount, from around 16%, which was seen at the lows in August when markets were fretting about the risk for a no-deal Brexit on October 31. As things look now, it would take a well-disciplined voting pact among opposition parties, or a outright coalition between the Labour and Liberal Democratic parties, to threat the Conservatives.

    [USD, CHF]
    EUR-CHF is up for a third consecutive day, printing a one-week high at 1.0970. This puts in a little more space from the six-week low seen last Thursday at 1.0863. The cross has been lifted by Brexit news, with opinion polls showing a growing lead for PM Johnson's Conservative party. 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 posted an 11-day low at 1.3190 in what is now a fourth consecutive trading day of decline. This puts in some further space from the five-month peak seen last week at 1.3270. The latest down leg was driven by broader declines in the U.S. dollar, and was seen despite a 1.5%-plus drop in oil prices. A tentative risk-on mood has been prevailing, 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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