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By XE Market Analysis November 28, 2019 3:36 am
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    XE Market Analysis: Europe - Nov 28, 2019

    The pound has rallied to six-month highs against both the euro and yen, while printing a one-week high in the case against the dollar. The UK currency was given a boost by a much-watched poll, released late evening (UK time) yesterday, showing the Conservatives to be on course to win a working majority at the general election in two weeks. Cable's high is 1.2950, up on yesterday's London closing levels near 1.2911-12. The poll, by YouGov, matches the picture being painted by poll trackers, so the outcome shouldn't be a surprise. There are other factors that suggests there will be limited scope for sustained follow-through buying of sterling, which continues to trade with about a 9% discount in broad trade-weighted terms from levels prevailing just ahead of the vote to leave the EU in 2016. One is that the YouGov poll found the margins for victory to be less than 5% in 30 of the seats projected to be won by the Conservatives. Another is that the risks the UK devolving will likely ratchet higher in the event that Brexit is delivered. The realities of trying to strike trade deals in a more protectionist world may also start to hit home in the event PM Johnson's party takes the UK out of the EU. Elsewhere, the main news development has been China's stern warning of "firm counter measures" after President Trump signed off on the U.S. Hong Kong Human Rights bill. This cast a dampener on risk appetite, and saw USD-JPY settle under 109.50 after yesterday posting a six-month peak at 109.61. AUD-USD hit a six-week low at 0.6759, and the other dollar bloc currencies also underperformed. EUR-USD crawled back above 1.1000, up from yesterday's two-week low at 1.0992.

    [EUR, USD]
    EUR-USD crawled back above 1.1000, up from yesterday's two-week low at 1.0992. The low was seen following a batch of above-forecast U.S. data, highlighted by a 2.1% growth print in the second estimate for Q3 GDP. Incoming data has been, overall, showing the U.S. economy to be in a relatively good place, fitting of Fed Chair Powell's "glass half full" characterisation of earlier in the week. One dampener is the fresh souring in relations between the U.S. and China, with the latter threatening as yet unspecified "counter measures" after President Trump signed off on the Hong Kong Human Rights bill. In the Eurozone, confidence data over the past week showed some signs of stabilisation in the manufacturing sector, but the preliminary November PMI surveys also showed the spectre that weakness is spreading to the dominant services sector. We retain a neutral-to-bearish view of EUR-USD. The pair 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, would likely keep EUR-USD's bias to the downside. Note that U.S. markets are closed today for the Thanksgiving holiday, which will be the start of a long "bridge" weekend for many market participants in the U.S.

    [USD, JPY]
    USD-JPY settle under 109.50 after yesterday posting a six-month peak at 109.61. AUD-JPY came under more acute pressure as risk appetite soured after China's threatened "firm counter measures" after President Trump signed off on the U.S. Hong Kong Human Rights bill. The biggest directional driver of the yen will likely to remain the ebb and flow of risk appetite in global markets. 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 comfortably in positive expansion with 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 rallied to six-month highs against both the euro and yen, while printing a one-week high in the case against the dollar. The UK currency was given a boost by a much-watched poll, released late evening (UK time) yesterday, showing the Conservatives to be on course to win a working majority at the general election in two weeks. Cable's high is 1.2950, up on yesterday's London closing levels near 1.2911-12. The poll, by YouGov, matches the picture being painted by poll trackers, so the outcome shouldn't be a surprise. There are other factors that suggests there will be limited scope for sustained follow-through buying of sterling, which continues to trade with about a 9% discount in broad trade-weighted terms from levels prevailing just ahead of the vote to leave the EU in 2016. One is that the YouGov poll found the margins for victory to be less than 5% in 30 of the seats projected to be won by the Conservatives. Another is that the risks the UK devolving will likely ratchet higher in the event that Brexit is delivered. The realities of trying to strike trade deals in a more protectionist world may also start to hit home in the event PM Johnson's party takes the UK out of the EU.

    [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 posted a two-day high at 1.3294 on the back of underperformance in the Canadian currencies amid a souring in risk appetite after China's threatened "firm counter measures" after President Trump signed off on the U.S. Hong Kong Human Rights bill. Oil prices were showing a loss over of over 1.5% from yesterday's highs in early London trading. The nine-day low USD-CAD saw last Friday at 1.3254 provides a downside focal point. 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. The 10-year U.S. over Canadian yield spread has been remaining in near lock-step since. At prevailing levels, USD-CAD is trading near to the midway point of a broadly, at times choppy, sideways range that's been seen since July 2018. More of the same looks likely.

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