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By XE Market Analysis November 20, 2019 4:23 am
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    XE Market Analysis: Europe - Nov 20, 2019

    The dollar and yen have firmed up amid a risk-off turn in global markets as tensions between the U.S. and China bubble up. The U.S. Senate yesterday passed a bill in support of Hong Kong's pro-democracy protestors, to which Beijing responded sharply, accusing Washington of being ignorant of "facts and truths" while threatening retaliation for interfering what it sees as its internal affairs. This comes with little sign of the long-since tabled, markedly unambitious, "phase 1" partial trade deal coming to fruition. Sources cited by Reuters report that U.S. President Trump is wanting deeper concessions from China in return for making a full roll back of tariffs and cancelling additional tariffs scheduled to take effect on 15 December, which is what Beijing is demanding. Against this backdrop, the yen has seen its risk premium rise, albeit moderately so. USD-JPY ebbed to a six-day low at 108.35, with the Japanese currency outperforming an otherwise firm dollar. EUR-JPY posted a six-day low, and other yen crosses also declined. The narrow trade-weighted USD index (DXY) printed a two-day high at 97.93, putting in some distance from the 15-day low seen on Monday at 97.68. EUR-USD concurrently saw a two-day low at 1.1061, and Cable a three-day low at 1.2900. Sharp declines in oil prices, where concerns of a supply glut have run into concerns about the U.S.-China situation, have driven underperformance in the Canadian dollar, lifting USD-CAD to a near six-week high at 1.3296. The pair is up nearly 1% from yesterday's lows. Front-month WTI crude futures have dropped by 4% over the last two days, yesterday posting the biggest one-day tumble in seven weeks. The Australian and New Zealand dollars are also lower, though by a lesser extent, and most developing-nation currencies are softer.

    [EUR, USD]
    EUR-USD posted a two-day low at 1.1061 amid a generally firmer dollar environment (outside the case of USD-JPY). The narrow trade-weighted USD index (DXY) printed a two-day high at 97.93, putting in some distance from the 15-day low seen on Monday at 97.68. This has happened concomitantly with a pronounced drop in U.S. Treasury yields (the 10-year T-note yield was down 4.5 bp on the day at the time of writing, and down by over 20 bp in less than two weeks), showing that dollar demand on this occasion has been of the safe-haven variety. The evident struggle for the U.S. and China to finalize the previously much trumpeted, and markedly unambitious, "phase 1" partial trade deal, coupled with a clash between Washington and Beijing over the Hong Kong situation, has rekindled risk aversion in global markets. Taking a step back, EUR-USD has been chopping around 1.1050 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 near zero 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 today are likely to to bolster the Fed-on-hold view.

    [USD, JPY]
    The yen has firmed up amid a risk-off turn in global markets as tensions between the U.S. and China bubble up. The U.S. Senate yesterday passed a bill in support of Hong Kong's pro-democracy protestors, to which Beijing responded sharply, accusing Washington of being ignorant of "facts and truths" while threatening retaliation for interfering what it sees as its internal affairs. This comes with little sign of the long since tabled, and unambitious, "phase 1" partial trade deal coming to fruition. Sources cited by Reuters report that U.S. President Trump is wanting deeper concessions from China in return for making a full roll back of tariffs and cancelling additional tariffs scheduled to take effect on 15 December. Against this backdrop, the yen has seen its risk premium rise, albeit moderately so. USD-JPY ebbed to a six-day low at 108.35, with the Japanese currency outperforming an otherwise firm dollar. EUR-JPY posted a six-day low, and other yen crosses also declined. 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]
    The pound has traded softer over the last day, with both the dollar and yen outperforming on respective safe-haven bids, while the UK currency has corrected a little against the euro, after reaching a six-month high versus the common currency on Monday. Political campaigning is in full swing in the UK ahead of the 12-December election. The latest update on Politico's poll tracker has support for the Labour Party shifting up a point to 30%, still some way behind PM Johnson's Conservatives, which has also ticked up by a point, to 41%. The Conservatives are well positioned to win the upcoming election and return to Parliament with a working majority under the UK's first past the post electoral system. The pound, while having rallied by about 8% from mid August low on the BoE's real trade-weighted measure, still trades with about a 9% discount from levels prevailing ahead of the vote to leave the EU in June 2016. There is a good reason to expect markets will continue to demand a discount. The UK's economic vitality have been damaged by a prolonged period of under investment due to Brexit-related uncertainty, for one. Also, some uncertainty remains about the upcoming election, particularly if Labour and the Liberal Democrats decide on forming a coalition (both have publicly said they don't want this, but things could change at crunch time, although we doubt it given the very low esteem the LibDems hold Labour leader Corbyn in). The spectre of a no-deal Brexit could also return if the Tories saw their lead whittle, which could give rise to a partnership with the Brexit Party. These are just several of the known possible scenarios.

    [USD, CHF]
    EUR-CHF has taken a rotation lower after a three consecutive trading day run higher, which culminated in a nine-day high at 1.0986. The cross has since turned back to the mid 1.0900s amid a backdrop of a decline in EUR-USD and rise in risk-off positioning.

    [USD, CAD]
    Sharp declines in oil prices, where concerns of a supply glut have run into concerns about the U.S.-China situation, have driven underperformance in the Canadian dollar, lifting USD-CAD to a near six-week high at 1.3296. The pair is up nearly 1% from yesterday's lows. Front-month WTI crude futures have dropped by 4% over the last two days, yesterday posting the biggest one-day tumble in seven weeks.

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