Home > XE Currency Blog > XE Market Analysis: Europe - Nov 26, 2019

AD

XE Currency Blog

Topics6865 Posts6910
By XE Market Analysis November 26, 2019 4:02 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 4789
    XE Market Analysis: Europe - Nov 26, 2019

    The yen printed fresh lows as a cautious risk-on sentiment persisted in markets in Asia after the three major U.S. equity indices posted new record highs. Top U.S. and Chinese trade negotiators held a telephone conference yesterday, while China's Global Times reported that the two sides were "moving closer to agreeing" a phase 1 deal (now more than six weeks after first being announced). Fed Chairman Powell also threw in to the mix of sentiment drivers a remark that "the glass as much more than half full." Merger and acquisition activity was another factor in the latest rally phase on Wall Street, while the ECB's chief economist, Lane, said that if the inflation outlook worsens the central bank could adjust all of its instruments -- quantitative easing, negative interest rates and the forward guidance. USD-JPY made a two-week high at 109.20 before retreating to the upper 108.00s. Most yen crosses also saw new highs. AUD-JPY, for instance, saw a six-day peak. The Swiss franc also saw some weakness, though USD-CHF and EUR-CHF remained within their respective Monday ranges. The Australian and New Zealand dollars saw moderate gains, though both still remained within their respective lows and highs from yesterday. The Canadian dollar, in contrast, saw moderate softness following a quite-sharp intraday dip (nearly 1% at the lows) in oil prices yesterday. Sterling has come under moderate pressure, reversing some of the gains it saw yesterday. With just over two weeks to go until the UK general election, the latest polling suggest a claw back in support for Labour, which has been taken as a sterling selling cut by markets. Politico's poll tracker is showing Labour support at 31%, up 2 points from yesterday, with support for the Tories down a point, to 42%.

    [EUR, USD]
    EUR-USD has settled to narrow range trading above the 12-day low that was seen yesterday at 1.1003. Incoming data have overall provided fresh signs 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 printed fresh lows as a cautious risk-on sentiment persisted in markets in Asia after the three major U.S. equity indices posted new record highs. Top U.S. and Chinese trade negotiators held a telephone conference yesterday, while China's Global Times reported that the two sides were "moving closer to agreeing" a phase-1 deal (now more than six weeks after first being announced). Fed Chairman Powell also threw in to the mix of sentiment drivers a remark that "the glass as much more than half full." Merger and acquisition activity was another factor in the latest rally phase on Wall Street, while the ECB's chief economist, Lane, said that if the inflation outlook worsens the central bank could adjust all of its instruments -- quantitative easing, negative interest rates and the forward guidance. USD-JPY made a two-week high at 109.20 before retreating to the upper 108.00s. Most yen crosses also saw new highs. AUD-JPY, for instance, saw a six-day peak. 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). This will keep 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 come under moderate pressure, reversing some of the gains it saw yesterday. With just over two weeks to go until the UK general election, the latest polling suggest a claw back in support for Labour, which has been taken as a sterling selling cut by markets. Politico's poll tracker is showing Labour support at 31%, up 2 points from yesterday, with support for the Tories down a point, to 42%. According to analysis by Datapraxis on Sunday, PM Johnson's Tory party is on track for a 48-seat majority in the House of Commons. A major focus will now be on the release of YouGov's MRP poll at 22:00 GMT (17:00 ET) on Wednesday. The poll, with its "multilevel regression and post-stratification" methodology, is widely acclaimed for having accurately portended the outcome of the 2017 general election. This poll also comes with the public having now been able to digest the political manifestos of all the parties, so it will be taken as a being a major prognostication of the election outcome. The pound 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 continued discount is merited. Political and prolonged Brexit uncertainty has led to chronic under investment and delayed decision making in the UK economy. Preliminary November PMI survey data showed the UK economy to be headed for negative GDP in Q4. Additionally, the risk of a no-deal Brexit scenario cannot yet be entirely ruled out. There is also a degree of uncertainty about this election with tactical alliances among smaller parties aiming to bolster the anti-Brexit vote, while the Liberal Democratic party is potentially a king maker in a hung parliament scenario.

    [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]
    The Canadian dollar has seen moderate softness following a quite-sharp intraday dip (nearly 1% at the lows) in oil prices yesterday. This has seen USD-CAD lift back above 1.3300, putting in some space from 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.

    Paste link in email or IM