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By XE Market Analysis October 8, 2019 3:49 am
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    XE Market Analysis: Europe - Oct 08, 2019

    The yen has softened concomitantly with a rise in equity markets in Asia amid cautious risk-on positioning. Chinese markets reopened after a week-long hiatus, and its CSI 300 equity index was showing a 0.9% gain as of the time of writing, while Japan's N-225 closed with just over a 1% gain and Australia's ASX 200 with a 0.5% rise. S&P 500 futures reversed most of yesterday's regular-session losses, and was showing a 0.4% rise in overnight trading. The cautious optimism comes with U.S. and Chinese deputy trade negotiators yesterday commencing two days of preliminary talks ahead of the first top-level ministerial negotiations in seven months. Better than expected earnings from South Korea's bellwether Samsung Electronics were also in the mix, counterbalancing news that eight Chinese technology companies were put on the U.S. blacklist. Against this backdrop, the yen ebbed, in accordance with its long standing inverse correlation with global stock market direction. USD-JPY printed a six-day high at 107.46, extending gains seen during the latter half of yesterday. EUR-JPY also ascended into six-day higher terrain, while AUD-JPY posted one-week highs. The Aussie made gains against most other currencies, as did the New Zealand and, to a less magnitude, the Canadian dollar. Elsewhere, EUR-USD trod a narrow range in the upper 1.0900s. Cable edged out a three-day low at 1.2285, though maintained a narrow range overall. Early data out of Europe showed above-forecast German industrial production, though this was accompanied by a contraction in orders and a deterioration in business sentiment. As for the U.S.-China trade situation, we advise taking a circumspect view. A narrow deal may be in the offing, but Beijing is not set on conceding to U.S. demands on intellectual property or its practice of subsiding industry. An angsty vibe looks likely to persist in global markets.

    [EUR, USD]
    EUR-USD has trod a narrow range in the upper 1.0900s so far today. Early data out of Europe showed above-forecast German industrial production, though this was accompanied by a contraction in orders and a deterioration in business sentiment. As for the U.S.-China trade situation, we advise taking a circumspect view. A narrow deal may be in the offing, but Beijing is not set on conceding to U.S. demands on intellectual property or its practice of subsiding industry. An angsty vibe looks likely to persist in global markets. Both the Eurozone and U.S. economies are experiencing economic slowing, the former at a more advanced stage, near to tipping into recession. EUR-USD has been in a clear bear trend since early 2018, descending from levels above 1.2500 over this time period. Last Monday's 28-month low at 1.0879 marked a reaffirmation of this trend. More of the same seems likely.

    [USD, JPY]
    The yen has softened concomitantly with a rise in equity markets in Asia amid cautious risk-on positioning. Chinese markets reopened after a week-long hiatus, and its CSI 300 equity index was showing a 0.9% gain as of the time of writing, while Japan's N-225 closed with just over a 1% gain and Australia's ASX 200 with a 0.5% rise. S&P 500 futures reversed most of yesterday's regular-session losses, and was showing a 0.4% rise in overnight trading. The cautious optimism comes with U.S. and Chinese deputy trade negotiators yesterday commencing two days of preliminary talks ahead of the first top-level ministerial negotiations in seven months. Better than expected earnings from South Korea's bellwether Samsung Electronics were also in the mix, counterbalancing news that eight Chinese technology companies were put on the U.S. blacklist. Against this backdrop, the yen ebbed, in accordance with its long standing inverse correlation with global stock market direction. USD-JPY printed a six-day high at 107.46, extending gains seen during the latter half of yesterday. EUR-JPY also ascended into six-day higher terrain, while AUD-JPY posted one-week highs.

    [GBP, USD]
    Sterling has retained a steady-to-softer bias versus most other currencies, and is trading with about a 14-15% discount in trade-weighted terms compared to levels prevailing ahead of the vote to leave the EU in June 2016. Brexit is coming to (another) head, with the EU to decide by the end of the week on whether there is a deal to be made with the UK government, based on the latter's proposals. It's not looking good, and it remains difficult to see if concessions on both sides are possible with regard to the Irish border issue; how to achieve a "clean" Brexit while at the same time maintaining the Good Friday Peace Agreement in a way that is satisfactory to both sides. The paradoxical case of an unstoppable force meeting an immovable object. If there is no agreement, then UK Prime Minster Johnson won't have a deal by the October-19 deadline set out in the newly created parliamentary bill that would require the prime minister to ask the EU for an extension in Brexit to January 31. Johnson has continued to assert that the UK would leave the EU without a deal on October 31 regardless, but that this is likely bluster; an attempt to both keep pressure on the EU and please Brexit voters. Attempting to pull the UK out of the EU on October 31 -- i.e. ignore the new legislation, as some in the opposition fear -- would be politically risky for him when he could easily lay the blame at the oppositions' feet. More likely Johnson would in this scenario acquiescence for an extension while making a big show of blaming the opposition. An election would then be staged in November or early December. In the event that Johnson's Conservative Party won (and they are favourites according to polling) then the same Irish border problem will be faced all over again. But this time, assuming Johnson carried a majority in Parliament, the PM would be able to make good on his threat to take the UK out of the EU without a deal.

    [USD, CHF]
    EUR-CHF has drifted lower after last week printing a two-week-plus high at 1.0979, extending a rebound from the 27-month low seen in early September at 1.0811.The cross has since settled to near the 1.0900 mark. Suspicions of SNB intervention abounded last week, which made 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 recent quarterly policy review, the SNB reaffirmed 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 has lost upside traction after rallying quite sharply in the latter part of last week. A basing and rebound price action in oil prices have returned some support to the Canadian dollar, or at least undermined the prime factor that had been weighing on the currency. WTI front-month crude prices are up about 4% from the lows seen last week, which were a culmination of a near 20% plunge from the highs seen in the immediate wake of the attack on Saudi crude facilities. Bigger picture, USD-CAD has been trending upwardly since the mid-July low at 1.3016. Bigger bigger picture, the pairing has been amid a sideways chop since mid January, ranging from 1.3016 on the downside to 1.3565 on the upside. More of the same looks likely.

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