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By XE Market Analysis October 4, 2019 3:43 am
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    XE Market Analysis: Europe - Oct 04, 2019

    The dollar has settled above yesterday's lows as markets anticipate today's release of the September non-farm payrolls report out of the U.S., which follows a run of recessionary-portending data this week. EUR-USD has ebbed back to the mid-to-upper 1.0900s, below yesterday's 10-day peak at 1.0999, and USD-JPY has settled around 106.75-85, above the one-month low seen yesterday at 106.48. Cable and other dollar pairings have seen a similar price action. The yen is consolidating after outperforming this week as risk-aversion took a grip of global markets. The Japanese currency is registering as the strongest currency out of the main currencies from week-ago levels, presently showing just over a 1% gain versus the dollar, a 1.6% rise against the Canadian dollar (which has been afflicted by a 6%-odd tumble in oil prices), and a 1.8% fall in the case versus the Swiss franc (where SNB buying intervention in EUR-CHF has been suspected). Any unexpected weakness in U.S. jobs would likely send the dollar to new lows, and the yen to new highs, concomitantly with Treasury yield declines and renewed stock market selling. In this scenario, commodity and developing-economy currencies would also underperform. We expect a 155k rise in non-farm payrolls, versus the previous 130k, though recent data suggests clear downside risk. The "whisper number" (what fund managers are anticipating) is some way lower than this. Hourly earnings are seen rising 0.3% from 0.4% in August, while the unemployment rate, a laggard indicator of economic health, should dip a tenth to 3.6% (which would be lowest since the 3.5% for December 1969). In addition, the August trade report is due and should reveal a slightly wider deficit of -$54.2 bln from -$54.0 in July.

    [EUR, USD]
    EUR-USD has ebbed back to the mid-to-upper 1.0900s, below yesterday's 10-day peak at 1.0999. While the Eurozone economy appears to be heading for recession, the bearish case for EUR-USD has, for now, been put on ice, with the U.S. economy starting to look much less exceptional in terms of growth performance. A sub-forecast U.S. employment report today, which is the clear risk, would fore many be greeted as marking an inflection point of the world's number one economy. 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, which in turn could give the dollar an underpinning at such time any erosion in Treasuries yield advantage has slackened out.

    [USD, JPY]
    USD-JPY has settled around 106.75-85, above the one-month low seen yesterday at 106.48. The Japanese currency is registering as the strongest currency out of the main currencies from week-ago levels, presently showing just over a 1% gain versus the dollar, a 1.6% rise against the Canadian dollar (which has been afflicted by a 6%-odd tumble in oil prices), and a 1.8% fall in the case versus the Swiss franc (where SNB buying intervention in EUR-CHF has been suspected). Any unexpected weakness in U.S. jobs would likely send the dollar to new lows, and the yen to new highs, concomitantly with Treasury yield declines and renewed stock market selling. In this scenario, commodity and developing-economy currencies would also underperform.

    [GBP, USD]
    Sterling failed to sustain a rally seen yesterday as it become clear that there is quite broad parliamentary support for Prime Minister Johnson's Brexit proposals -- including, most notably, fro, Northern Ireland's DUP Party and some of the Brexiteer stalwarts in the Conservative Party -- specifically on those proposals detailing his ideas on solving the Irish border conundrum (how to leave the EU while maintaining a free flowing border on the island Ireland that maintains the conditions of the Good Friday Peace Agreement and the integrity of both the realm of the UK and the EU's single market). Cable had also been lifted by a broad bout of dollar selling following another data miss in the U.S. The pair left a peak at 1.2413 before retreating to the 1.2350 area, little changed from week-ago levels. Johnson's proposals have met a cool response from EU officials, which has indicated that ideas for the Irish border fall short of what is needed to strike a deal. Brussels is particularly concerned about the part that gives Stormont (Northern Ireland's Assembly) the ability to vote on the arrangement every four years without provisioning what would happen in the event it voted against it. The leader of the principal opposition, Jeremy Corbyn, is also taking a strong line against Johnson's plan. As things stands, it doesn't look likely that a deal will be reached, though we'll have to seen how negotiations pan out. Time is short, with only a week of negotiations left until the Queen's speech on October 14th and the EU's summit on the 17th. It's looking likely that Brexit will be delayed until January 31 (which would be triggered by law if no deal is made by October 19th). A general election will be staged most likely in late November or early December. In the event that Johnson's Conservative Party won (and judging by polling, this is quite possible in the UK's first past the post electoral system) then the same intractable Irish border problem will be faced all over again -- but this time, with a majority in Parliament, Johnson would be able to take the UK out of the EU without a deal.

    [USD, CHF]
    The Swiss franc has found itself in the rare position of being biggest loser out of the main currencies this week, registering a 1.8% decline against the yen, the strongest currency, from week-ago levels. EUR-CHF yesterday printed a two-week high at 1.0979, extending a rebound from the 27-month low seen in early September at 1.0811. Suspicions of SNB intervention abound, which makes sense from a tactical perspective, with the central bank having stood aside when then cross was downward trending amid broader euro underperformance before stepping in when EUR-USD was on the ascent. At its quarterly policy review earlier in the month, the SNB repeated its long held view that the franc remains "highly valued", while highlighting fragile markets and affirming the commitment to intervene in currency markets if needed. The franc regularly tops the Economist magazine's Big Mac purchasing parity comparison of currencies as being the most overvalued currency.

    [USD, CAD]
    USD-CAD rallied sharply this week as the Canadian dollar become afflicted by the 6%-off tumble in oil prices this week, which compounded the steep losses that were seen in the prior week. This has offset a narrowing in the Greenback's yield advantage over the Loonie. The pair logged a one-month high yesterday at 1.3348. The high seen on September 3, at 1.3382, which is a 15-week peak, provides an upside focal point. Any unexpected weakness in the U.S. jobs report today, which is the clear risk, would likely catalyse a correction in USD-CAD at the initial blow, though it would also send oil prices lower, especially with the weakening demand outlook dominating in crude market narratives presently, which would in turn curtail demand for the Canadian dollar.

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