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By XE Market Analysis November 22, 2019 3:56 am
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    XE Market Analysis: Europe - Nov 22, 2019

    Currencies have been seeing unremarkable movement against a backdrop of sputtering global stock markets. Mixed leads from the U.S.-China trade negotiation front has fostered a fatigue in markets. President Xi said today that China wants to work out an initial trade agreement and has been trying to avoid a trade war, but is also not afraid to retaliate if necessary. Reuters cited sources with ties to the Trump administration saying that negotiations could slide into next year. President Trump is also expected to sign off on the "Hong Kong Human Rights and Democracy Act," which is likely to put added strain on relations. The MSCI Asia-Pacific equity index managed to find a footing today, despite a 1% loss in China's bellwether CSI 300 index, after dropping 1.4% yesterday, when it reached its lowest levels since October 30. In the forex realm, USD-JPY has so far seen range of less than 15 pips above 108.50. From a week ago, the pair is showing a fractional 0.2% decline, and from month-ago levels the pair is virtually net unchanged. On the year-to-date, USD-JPY is down 0.9%. The narrow ranges reflects the tendency for both the dollar and yen to rise and fall in approximate unison against other currencies, with both being utilized as safe-haven currencies. EUR-USD has settled back in the mid 1.10s after an upside run stalled yesterday at 1.1097, a 17-day peak. USD-CAD edged out a three-day low at 1.3270 in early trading in Asia, extending Canadian-dollar driven losses seen after BoC Governor Poloz stated that interest rates are "about right," which was taken as a walk-back of recent dovish signalling. Oil prices, while softer today, have also rallied by nearly 6% over the last two days. Sterling has remained comfortably within recent ranges. Focus today falls on preliminary November PMI surveys out of Europe, the UK, the U.S. and elsewhere. Of interest, Bloomberg's Consumer Comfort Index showed consumer confidence amongst Republican voters at its lowest since May 2018.

    [EUR, USD]
    EUR-USD has settled back in the mid 1.10s after an upside run stalled yesterday at 1.1097, a 17-day peak. The high was a product of dollar weakness as risk appetite picked up in markets, though the U.S. currency rebounded as mixed signalling from the U.S. and China on their progress in trade talks rekindled wariness in markets. Focus today is on the preliminary November releases of PMI survey data out of Europe and North America. Median forecasts have been skewed to the downside, so the biggest surprise factor would come from firmer than expected data. One thing to note, is that while the U.S. 10-year T-note over Bund yield spread has narrowed by about 11 bp over the last couple of weeks, EUR-USD has still traded net lower. The DXY USD index is also up over this time period, illustrating that the U.S. currency has been underpinned by a safe-haven bid, which has been offsetting the lower yield spread dynamic. More of the same looks likely, especially with a U.S.-China "phase 1" trade deal looking increasingly unlikely to happen this side of Christmas. 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 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]
    USD-JPY has so far seen range of less than 15 pips above 108.50. From a week ago, the pair is showing a fractional 0.2% decline, and from month-ago levels the pair is virtually net unchanged. On the year-to-date, USD-JPY is down 0.9%. The narrow ranges reflects the tendency for both the dollar and yen to rise and fall in approximate unison against other currencies, with both being utilized as safe-haven currencies. In data today, Japan's flash composite PMI for November lifted to 49.9 in the headline reading, up from 49.1 in October. This had little impact on the yen. 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 remained comfortably within recent ranges so far today. The Conservative party has maintained a commanding lead in opinion polls over two weeks into the official election campaign period ahead of the 12-December general election. From the markets perspective, this is seen as a positive for the pound, implying, as things stand, that PM Johnson's party will be returned to government with a working majority, and that the Brexit deal on the table will be implemented and that the UK will leave the EU in January, at which time the country will enter a transition phase. In this scenario, another referendum on EU membership would be avoided. The UK currency has rallied by about 8% from mid August low on the BoE's real trade-weighted measure, but 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. This has shown up in tepid productivity advances. Uncertainty remains about the upcoming general election, on 12 December, particularly if Labour and the Liberal Democrats decide to form a coalition (both say 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 in opinion polls whittle, which could give rise to a partnership with the Brexit Party and re-introduce a risk of a no-deal Brexit scenario. Then there is the issue of the weakening cohesiveness of the union that is the UK.

    [USD, CHF]
    EUR-CHF has printed a 15-day high at 1.1010, making this the sixth consecutive trading day a higher high has been achieved. This has returned the cross to the upper portion of a broadly sideways range that's been persisting over the last three months.

    [USD, CAD]
    USD-CAD edged out a three-day low at 1.3270 in early trading in Asia, extending Canadian-dollar driven losses seen after BoC Governor Poloz stated that interest rates are "about right," which was taken as a walk-back of recent dovish signalling. Oil prices, while softer today, have also rallied by nearly 6% over the last two days. At prevailing levels USD-CAD is trading near to the midway point of a broadly sideways range that's been seen since July 2018.

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