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By XE Market Analysis November 25, 2019 4:30 am
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    XE Market Analysis: Europe - Nov 25, 2019

    The yen has weakened amid risk-on trading after Beijing pledged new measures to protect intellectual property. While many market narratives have a fatigued tone after repeated and often banal rhetoric with regard to progress being made six weeks after the "phase 1" deal was announced, the fact that neither side has walked away seems to show there is commitment. A key test looms, with the U.S. scheduled to hike tariffs on $156 bln of of largely technology imports from China. Reuters suggests that the indications are that these tariffs will be delayed to give negotiators more time. Both U.S. and Chinese officials and trade experts cited by Reuters suggest that a more expansive "phase 2" deal is not looking viable, however. Despite this, and a strong pro-democracy result in Hong Kong's council elections, markets have been happy to run with a risk-on theme for now. USD-JPY lifted to a one-week high at 108.89 on the back of yen underperformance. AUD-JPY lifted above its Friday peak in making 74.00, while EUR-JPY and other most other yen crosses also gained. The dollar bloc currencies gained moderately. NZD-USD managed to firm above its Friday high in making 0.6427, though the Australian and Canadian dollars remained below their respective peaks seen on Friday. EUR-USD has been making time in a narrow range just above the 10-day low seen on Friday at 1.1014. Sterling traded modestly firmed against the dollar and euro, though remained within Friday's ranges. The latest opinion polls show PM Johnson's Conservative party lead to have extended slightly, with Politico's poll tracker showing 43% support for the Tories, up a point from Friday, and Labour's support down a point, at 29%.

    [EUR, USD]
    EUR-USD has been making time in a narrow range just above the 10-day low seen on Friday at 1.1014. The below-forecast Eurozone PMI data versus the above-forecast U.S. PMI data on Friday provided a fresh sign of the relative strength of the U.S. economy relative to the Eurozone economy. We retain a neutral-to-bearish view of EUR-USD. The U.S. heads in to the holiday-shortened Thanksgiving week. There will be a flurry of data releases through to Thursday, but the data won't alter the current outlook that the U.S. economy has stabilized around a 2% growth rate, and that while downside risks remain, positive elements are perking up. The Eurozone features a busy calendar of top tier releases, which will provide the latest test of the extent to which manufacturing weakness has spread to other sectors of the economy. 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 Fed's measure of the dollar's broad trade-weighted dollar is at near three-year highs. A continuation of dollar firmness, which we anticipate for now, would likely keep EUR-USD's overall bias to the downside.

    [USD, JPY]
    The yen has weakened amid risk-on trading after Beijing pledged new measures to protect intellectual property. While many market narratives have a fatigued tone after repeated and often banal rhetoric with regard to progress being made six weeks after the "phase 1" deal was announced, the fact that neither side has walked away seems to show there is commitment. A key test looms, with the U.S. scheduled to hike tariffs on $156 bln of of largely technology imports from China. Reuters suggests that the indications are that these tariffs will be delayed to give negotiators more time. Both U.S. and Chinese officials and trade experts cited by Reuters suggest that a more expansive "phase 2" deal is not looking viable, however. Despite this, and a strong pro-democracy result in Hong Kong's council elections, markets have been happy to run with a risk-on theme for now. USD-JPY lifted to a one-week high at 108.89 on the back of yen underperformance. AUD-JPY lifted above its Friday peak in making 74.00, while EUR-JPY and other most other yen crosses also gained.

    [GBP, USD]
    Sterling has traded moderately firmer against the dollar and euro, though remained within Friday's ranges. The latest opinion polls show PM Johnson's Conservative party lead to have extended slightly, with Politico's poll tracker showing 43% support for the Tories, up a point from Friday, and Labour's support down a point, at 29%. This comes with the main parties having now released their election manifestos. Johnson will being taking some solace from this, with Labour showing no sign of the late surge in support they saw in the 2017 election. The Conservatives need to win an outright majority to push the withdrawal deal with the EU through, and implement Brexit in January, at which point the UK would enter a transition period that would last until the end of 2020, during which time not a lot would change in practical terms (with the UK remaining in the single market and customs union). If Johnson's party has less than a working majority -- which is a risk as smaller parties are engaging in tactical alliances to bolster the anti-Brexit vote -- then he would face a tricky situation as both the Brexit Party and Northern Ireland's DUP (i.e. the other right-wing parties) are opposed to the withdrawal agreement, while the Liberal Democrats have suggested they could support the Tories on the condition there is a second referendum on EU membership (a.k.a. a "final say" or "confirmatory" referendum), which would put the option of remaining in the EU back on the table. The pound has and remains the principal conduit of investors view of Brexit. The currency rallied by about 8% from mid August low on the BoE's real trade-weighted measure, as the risk for a no-deal Brexit fell, but still trades with about a 9% discount from levels prevailing ahead of the vote to leave the EU in June 2016. The preliminary November PMI survey data showed the UK economy to be headed for negative GDP in Q4. Political and prolonged Brexit uncertainty has led to chronic under investment and delayed decision making.

    [USD, CHF]
    EUR-CHF has settled at modestly softer levels after printing an 18-day high on Friday at 1.1010. Recent gains have 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 has traded moderately softer today as the Canadian dollar, and its dollar-bloc brethren, find some support against a risk-on backdrop in global markets after Beijing announced new measures to protect intellectual property. Oil prices having been trading steadily, near to levels seen a week ago following a sharp down-then-back-up price action during the middle part of last week. While softer on the day, USD-CAD remains above the six-day low seen on Friday at 1.3254. The low was seen after BoC Governor Poloz stated that interest rates are "about right," which was taken as a partial walk-back of recent dovish signalling from the central bank. At prevailing levels USD-CAD is trading near to the midway point of a broadly sideways range that's been seen since July 2018. More of the same looks likely.

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