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By XE Market Analysis November 21, 2019 3:25 am
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    XE Market Analysis: Europe - Nov 21, 2019

    The yen edged out fresh highs before paring these gains against the dollar and dollar bloc currencies, with net directional change among the main currencies overall registering as minimal as the London interbank session got under way. USD-JPY posted a one-week low at 108.27 before recouping to near net unchanged levels above 108.50. AUD-JPY and CAD-JPY also posted new lows before rebounding, while EUR-JPY and GBP-JPY, among other yen crosses remained above their respective Wednesday lows. EUR-USD has been idling round 1.1075, near net unchanged over the last two days. USD-CAD has been consolidating just below the six-week high seen yesterday at 1.3327. AUD-USD edged out a two-day low at 0.6785. Global stock markets continue to sputter following a report by Reuters, citing sources close to the White House, that a U.S.-China trade deal is unlikely this year. Reuters also reported that President Trump is expected to sign off the two bills intended to support pro-democracy protesters in Hong Kong. This saw the yuan fall to a three-week low today. Note that a Bloomberg article citing Chinese Vice Premier Liu remaking that he is "cautiously optimistic" about a preliminary trade deal were from remarks that Liu made on Wednesday evening, before the Reuters scoop. A risk-off, or at least a risk-wary, sentiment looks likely to prevail which could keep safe-haven currencies, primarily the yen and dollar, underpinned, while currencies with higher beta characteristics, such as the dollar bloc and many developing-world currencies, under pressure.

    [EUR, USD]
    EUR-USD has been idling round 1.1075, near net unchanged over the last two days. Uncertainty about the potential for the U.S.-China to agree on the formerly much-trumpeted "phase 1" trade deal has rekindled risk aversion in global markets, in turn underpinning U.S. Treasuries and pushing down U.S. yields. The 10-year T-note yield printed a three-week low near 1.710% earlier, and is down be nearly 25 bp in less than two weeks. This has compressed the U.S. benchmark's yield advantage relative to the 10-year Bund yield to near 209 bp, down from 221 bp less than two weeks ago, matching the 22-month low point seen in early November. Despite this, EUR-USD at prevailing levels is down by a net 0.8% from October's closing level. The DXY USD index is also up over this time frame, illustrating that the U.S. currency has been underpinned by a safe-haven bid, offsetting the lower yield spread dynamic. More of the same looks likely. 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.

    [USD, JPY]
    The yen has settled lower after edging out fresh lows highs against the dollar and dollar bloc currencies, with net directional change among the main currencies overall registering as minimal as the London interbank session got under way. USD-JPY posted a one-week low at 108.27 before recouping to near net unchanged levels above 108.50. AUD-JPY and CAD-JPY also posted new lows before rebounding, while EUR-JPY and GBP-JPY, among other yen crosses remained above their respective Wednesday lows. Global stock markets continue to sputter following a report by Reuters, citing sources close to the White House, that a U.S.-China trade deal is unlikely this year. Reuters also reported that President Trump is expected to sign off the two bills intended to support pro-democracy protesters in Hong Kong. This saw the yuan fall to a three-week low today. Note that a Bloomberg article citing Chinese Vice Premier Liu remaking that he is "cautiously optimistic" about a preliminary trade deal were from remarks that Liu made on Wednesday evening, before the Reuters scoop. 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 couple of days, 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 is now at 42%. As things stand, the Conservatives look to be 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, 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 other known unknowns, too, while there is the issue of the weakening cohesiveness of the union that is the UK.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.0900s after stalling on a test of 1.1000 yesterday.

    [USD, CAD]
    USD-CAD has been consolidating just below the six-week high seen yesterday at 1.3327. We retain a bullish view of the pairing, assuming that a persistent phase of risk aversion will unfold with the U.S. and China looking increasingly unlikely to reach an agreement on trade before year-end. This should weigh oil prices, particularly with oversupply of crude looking to be an issue. The BoC is also newly established on a dovish policy stance.

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