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By XE Market Analysis November 29, 2019 3:38 am
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    XE Market Analysis: Europe - Nov 29, 2019

    The main currencies have continued to trade without directional vigour and in low volumes. U.S. markets will be returning only for a half day today, which will keep volumes down after the Thanksgiving holiday yesterday (a so-called bridge weekend for many). Stock markets in Asia have continued to sputter lower, and S&P 500 futures are down 0.3%. The concern is that the souring in U.S.-China relations over Hong Kong (where fresh large pro-democracy demonstrations are reportedly being planned for the weekend) will make trade-deal making harder, seven-weeks after the "phase-1" deal in principle was announced. Despite this backdrop, the yen has remained near recent lows and the Australian and New Zealand dollars have posted modest gains. Japan released a batch of data, most notable of which was the biggest fall in two years of in industrial production, which contracted 4.2% m/m, much worse than the median forecast for a 2.1% decline. Slower car sales as a consequence of Japan's recent sales tax hike was blamed, and this followed data yesterday showing a precipitous 14.4% dive in October retail sales. BoJ governor Kuroda during parliamentary testimony today said there is "ample room" for more easing, though fresh stimulus was being considered at the currency juncture. Implied volatilities of major currencies have hit record lows this week, which comes amid low vols in major interest rate and global stock markets. Among the various factors and theories explaining this is the low interest rate environment and guidance for more of the same (such as the "Powell put"), low inflation, and the increasing share of passive and robo investing in investment decision making, which has created a herding behaviour.

    [EUR, USD]
    EUR-USD has continued to see narrow ranges, holding above 1.1000 and Wednesday'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, the latest being yesterday's release of the November ESI survey, but the outlook remains fragile. 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.

    [USD, JPY]
    The yen has remained near recent lows despite stock markets in Asia continuing to sputter lower today on concerns that the souring in U.S.-China relations over Hong Kong (where fresh large pro-democracy demonstrations are reportedly being planned for the weekend) will only make trade-deal making that much harder, seven-weeks after the "phase-1" deal in principle was announced. The currency seemed to react, for a change, to domestic data. Japan released a batch of data today, most notable of which is the biggest fall in two years of in industrial production, which contracted 4.2% m/m, much worse than the median forecast for a 2.1% decline. Slower car sales as a consequence of Japan's recent sales tax hike was blamed, and this followed data yesterday showing a precipitous 14.4% dive in October retail sales. BoJ governor Kuroda said during parliamentary testimony today that there is "ample room" for more easing, though fresh stimulus was being considered at the currency juncture. USD-JPY posted a high today at 109.60, which is 1 pip shy (by our data) of the six-month peak seen on Wednesday. The pair subsequently settled only fractionally lower. 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 has been reaffirming the central bank's commitment to monetary easing to achieve its 2% inflation target (he has admitted that "it's taking time").

    [GBP, USD]
    Sterling has come off the respective one-week and six-month highs it saw against the dollar, euro and yen, following the late-Wednesday release of the YouGoc poll in the UK, a bellwether poll of 100,000 voters that predicted PM Johnson's party being returned to parliament with a solid working majority of 68 at the general election on 12 December. As we have pointed out earlier there are a number of reasons to suggest that follow-through buying will be curtailed. The YouGov poll matches the picture being painted by poll trackers, so the outcome shouldn't be a surprise. The poll also 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. Sterling 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.

    [USD, CHF]
    EUR-CHF has settled at modestly softer levels after printing a three-week high last 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 settled back after posting a three-day high yesterday at 1.3299. The high yesterday was the product of Canadian dollar weakness amid a spoiling risk appetite after China's threatened "firm counter measures" to President Trump's signing-off on the U.S. Hong Kong Human Rights bill. Oil prices came under pressure, though have since stabilized, and WTI benchmark prices are set for its biggest monthly gain since April, currently up by 5.5% from month-ago levels. USD-CAD has so far this week remained above the 10-day low seen last Friday at 1.3254, which was set 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 over the last week. 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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