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By XE Market Analysis October 3, 2019 4:11 am
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    XE Market Analysis: Europe - Oct 03, 2019

    The dollar has steadied after descending against most of the other main currencies amid a deepening sense that the U.S. economy is in the grip of significant slowdown, if not heading to a recession. There was still some price dynamics to note, with USD-CAD, one of the few pairings where the U.S. currency gained, eking out a fresh one-month high at 1.3335. This extended the sharp rally seen yesterday, driven by pronounced underperformane in the Canadian dollar as oil prices crashed to fresh lows, which offset the narrowing in the Greenback's yield advantage over the Loonie. USD-JPY edged out a fresh low, at 106.96, which matched the three-week low that was seen last week. EUR-JPY and GBP-JPY also edged out new lows. The Japanese currency is showing gains versus all the other main currencies from week-ago levels, reflecting a rekindling in demand for safe havens in global markets. EUR-USD extended yesterday's rally slightly, and printed a one-week high at 1.0965 before settling back. EUR-CHF has continued a conspicuous rally, which is now in its third consecutive day, with the cross now in three-week territory above 1.0970. Suspicions of SNB intervention abound, which makes sense from a tactical perspective, to stand aside when then cross was downward trending amid broader euro underperformance and then to step in when EUR-USD is on the ascent. Of note is a tweet from the editor from China's Global Times, Hu Xijin, asserting that "U.S.economy is not as promising as the White House brags" and that "more terrible consequences will come" from the trade war. Perhpas this is Beijing's way of informally sending an message ahead of next week's talks.

    [EUR, USD]
    EUR-USD extended yesterday's rally slightly, and printed a one-week high at 1.0965 before settling back. The gains reflected a broader turn lower in the dollar amid growing data points showing the U.S. economy to be in the grip of a pronounced phase of economic slowing. Any further signs that the U.S. economy flagging would likely spark a more declines in the dollar, while the safe haven yen could become the long currency of choice in the event global stock markets shift from a sputtering price action to a discernable bear trend. This would make a EUR-JPY a better route to express euro bearishness. Friday's U.S. nonfarm payroll report is a major focus, as will today's services ISM report, as signs that slowing in manufacturing is spreading into the service sector would be worrisome. On the euro side of the coin, preliminary September Eurozone HICP came benign, at 0.9% y/y and 1.0% y/y in the respective headline and core readings. The preliminary September PMI surveys out of the Eurozone also showed the economy to be in a state of stagnation. The U.S. imposition of tariffs of 10% on EU aircraft, and 25% on EU agricultural and industrial goods, won't help. There are lots of ECB policymakers still due to speak this week, which should a deliver a strong net dovish message. Overall, the bearish case for EUR-USD has been put on ice, for now, with the U.S. economy now looking less exceptional in terms of growth performance. This should keep the dollar on a back foot, though any prolonged period of risk aversion in global markets would likely generate demand for U.S. Treasuries, being the largest risk-free asset market in the world.

    [USD, JPY]
    USD-JPY has pressed into six-day low terrain under 107.60, extending the correction after the pair yesterday matched the two-month high seen in mid September at 108.47. A mixture of broader dollar weakness and broader yen strength has been a play, with the former descending against most currencies following yesterday's U.S. manufacturing ISM shocker and the yen picking up safe haven demand as global stock markets turn ugly, fearing that the world's biggest economy is at a point of inflection with regard to recessionary risk. We expect further downside in USD-JPY and yen crosses. Any further signs that the U.S. economy is heading to a recession would likely spark a more pronounced downward rotation in the dollar, while the safe haven yen could become the long currency of choice in the event global stock markets shift from a sputtering price action to a discernable bear trend. Friday's U.S. nonfarm payroll report is a major focus, while today's September ADP employment survey will be of interest. We look for a 145k increase in private payrolls, versus the previous 195k.

    [GBP, USD]
    The pound has hunkered down above recent lows seen against the dollar and euro. The UK government has given the EU its Brexit proposals on a divorce plan leans heavily on technological solutions to achieve the aim of ensuring that there is no hard border between Ireland and Northern Ireland and that the integrity of the single market is maintained. And the response has been... cool. It looks unlikely that it will allay Ireland's concerns. And so, as things stand, it looks likely that Prime Minister Johnson won't get a deal by October 19, and the new law requiring an extension in Brexit to January 31 will kick in. Johnson has continued to assert that the UK will leave the EU on October 31 without a deal if necessary, despite the new law (the Benn bill). We presume this essentially an empty threat given the Benn bill. There has been speculation that the PM might be looking to take the UK out of the EU without a deal on a technicality, and opposition parties are plotting to head-off this risk off by taking the government down with a confidence motion -- and they have the numbers -- putting in a interim government, secure a delay in Brexit to January 31 and then organize a general election for November or early December. In the event that Johnson's Conservative Party won the election (which, judging by polling, is quite possible in the UK's first past the post electoral system) they the same intractable Irish border problem will be faced all over again. But, with a majority in Parliament, Johnson would in this scenario, be able to take the UK out of the EU without a deal.

    [USD, CHF]
    EUR-CHF has continued a conspicuous rally, which is now in its third consecutive day, with the cross now in three-week territory above 1.0970. Suspicions of SNB intervention abound, which makes sense from a tactical perspective, to stand aside when then cross was downward trending amid broader euro underperformance and then to step in when EUR-USD is on the ascent.

    [USD, CAD]
    USD-CAD eked out a fresh one-month high at 1.3335. This extended the sharp rally seen yesterday, which was driven by pronounced underperformane in the Canadian dollar as oil prices crashed to fresh lows, which offset the narrowing in the Greenback's yield advantage over the Loonie.

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