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By XE Market Analysis November 29, 2018 3:38 am
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    XE Market Analysis: Europe - Nov 29, 2018

    The Dollar has come under broad pressure concomitantly with the 10-year U.S. T-note yield falling to a two-month low toward 3% after Fed Chairman Powell yesterday signalled a dovish turn at the central bank by saying that the Fed funds rate was "just below" neutral, revising the previous guidance of being "a long way from." This powered Wall Street to its biggest single-day rally in eight months, with the main indexes seeing gains of more than 2%. But what was good for stocks wasn't good for the Dollar. The USD index (DXY) has declined by nearly 1% from yesterday's highs, with EUR-USD concurrently lifting to a four-session high at 1.1392. USD-JPY fell to a three-day low at 113.21, partly on the Dollar's underperformance but also driven by an outperformance of the Yen in Asia, which also saw EUR-JPY, AUD-JPY and other Yen crosses decline. The Japanese currency picked up safe-haven demand as bullish stock market sentiment faded in Asia. Japan's Nikkei 225 closed near intraday lows but with a 0.4% gain, while the main Chinese indexes lost more than 1% for a second consecutive day. Mainland investors have reportedly been dominant sellers of Chinese shares in recent sessions, with pessimism remaining about the scope for Trump and Xi to improve trade relations at their meeting on Friday. BoJ member Masai, meanwhile, said that Japan's yield curve won't steepen as much as in the past due to the relatively lower growth potential of the Japanese economy.

    [EUR, USD]
    EUR-USD lifted to a four-session high at 1.1392 in a move driven by general Dollar weakness as the 10-year U.S. T-note yield falling to a two-month low toward 3%. The dynamic was sparked by Fed Chairman Powell yesterday affirming there has been a dovish turn at the central bank, as he said the Fed funds rate was "just below" neutral, revising the previous guidance of being "a long way from." This powered Wall Street to its biggest single-day rally in eight months, with the main indexes seeing gains of more than 2%. But what was good for stocks wasn't good for the Dollar. While EUR-USD has been amid a big-picture bear trend that's been in play since April, downside momentum has been waning in recent weeks as markets start to factor in pause in the Fed's tightening cycle from next spring. On the flipside, signs of flagging growth momentum in the Eurozone (such as last Friday's release of flash estimates of the November PMI surveys) and a back-and-forth process between Brussels and Rome over the budget planning of Italy's populist government remain negatives for the Euro, with Brexit also presenting risks. EUR-USD has support at 1.1358-60.

    [USD, JPY]
    USD-JPY fell to a three-day low at 113.21 as the Yen outperformed amid a generally softer Dollar environment. The U.S. currency weakened after Fed's Powell affirmed a dovish turn at the central bank, which drove the 10-year U.S. T-note yield fell to a two-month low toward 3%, while the Yen picked up safe-haven demand as bullish stock market sentiment, which saw the main U.S. indexes posted 2%-plus gains yesterday, faded in Asia. Japan's Nikkei 225 closed near intraday lows but with a 0.4% gain, while the main Chinese indexes have lost more than 1% for a second consecutive day. Mainland investors have reportedly been dominant sellers of Chinese shares in recent sessions, with pessimism remaining about the scope for Trump and Xi to improve trade relations at their meeting on Friday. BoJ member Masai, meanwhile, said that Japan's yield curve won't steepen as much as in the past due to the relatively lower growth potential of the Japanese economy. USD-JPY's fundamentals (yield differentials and the associated contrast between Fed and BoJ policy paths) remain supportive, though periodic episodes of risk aversion have been an intermittent offsetting bearish force. USD-JPY has resistance at 114.00, and support at 113.34-35.

    [GBP, USD]
    Cable has recouped to the lower 1.2800s from the two-week low seen earlier in the week at 1.2725. The Pound, meanwhile, has been trading mixed versus the Euro and Yen. The price action, overall, reflects the UK currency having found its feet following its post-weekend wobble. This is despite Chancellor (the UK's finance minster equivalent) Hammond saying yesterday that all versions of Brexit will leave the economy worse off, and with the BoE warning of a significant negative impact on the economy in the event of a no-deal Brexit. While the EU and UK have shaken hands on a deal, Brexit remains heavily clouded in uncertainty. One solace is the evident strong support among members of parliament -- outside the relatively small Eurosceptic Brexiteer cabal -- to avoid a no-deal crash-out Brexit scenario, which seems to be giving the pound buoyancy. John McDonnell, the shadow chancellor has become the first senior Labour Party minister to openly acknowledge, yesterday, that a second referendum "might be an option we seize upon," adding that a "no-deal" option should not be on the ballot paper. With Northern Ireland's DUP, to which PM May's Tory party depends on to operate as a minority government, yesterday stressing that it "cannot support" the deal on offer, Prime Minister May looks to be short of about 60 votes to get the deal over the line in parliament. The vote will be on December 11. Cable has support at 1.2696-1.2700, which encompasses the four-month lows seen in late October.

    [USD, CHF]
    EUR-CHF has recovered the 1.1300 handle after pegging a two-month low at 1.1261 yesterday. The recovery has tracked the rebound in EUR-USD. EUR-CHF has support at 1.1277-80, and resistance at 1.1325.

    [USD, CAD]
    USD-CAD has corrected back to around the 1.3250 mark after yesterday printing a five-month high at 1.3359. The driver has been the drop in U.S. Treasury yields after Fed chair Powell affirmed a dovish shift in the policy outlook. This drove the U.S. Dollar broadly lower, offsetting, for now the impact of the 33%-plus decline in oil prices since early October. Significant and sustained declines in oil prices is a negative for the Canadian economy as it dents its terms of trade. The Canadian data calendar brings Q3 current account figures today, and the Q3 GDP report tomorrow. We expect growth to slow 2.0% q/q growth, down from 2.9% in Q2. USD-CAD has support at 1.3215-17.

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