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By XE Market Analysis October 9, 2019 5:22 am
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    XE Market Analysis: Europe - Oct 09, 2019

    The dollar took a turn lower concomitantly with news, via Bloomberg sources, that China is open to agree a partial trade deal despite the U.S. blacklisting of Chinese organisations. This saw some unwinding in risk-on position as stock markets in Europe rallied. S&P 500 futures were showing a 0.8% gain heading into the New York interbank open. EUR-USD rose moderately, printing a high at 1.0990, though remaining shy of yesterday's peak at 1.0996. The yen underperformed, lifted USD-JPY despite a broader bid tone in the dollar, which tilted the pair towards the mid 107.0s. Brexit remained a core focus, with reports that the EU was apparently about to make significant concessions quickly shot down. Cable posted moderate gains, though the pound was showed modest losses.

    [EUR, USD]
    EUR-USD has lifted moderately amid a softer dollar, which has been concomitant with news, via Bloomberg, that China is apparently open to agree a partial trade deal despite the U.S. blacklisting of Chinese organisations. The pair printed a high at 1.0990, but has so far remained shy of yesterday's peak at 1.0996. 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]
    USD-JPY lifted back towards the mid 107.0s following a Bloomberg report cited sources saying that China is open to a partial trade deal with the U.S. despite the latter's blacklisting of a slew of Chinese organisations. This lifted the investor spirits and saw the yen take a turn lower, as per the currency's long standing inverse correlation with global stock market direction.

    [GBP, USD]
    Cable has been plying a narrow range above 1.2200 and yesterday's one-month at 1.2195. The pound continues to trade with about a 14-15% discount in trade-weighted terms versus levels seen ahead of the EU referendum in June 2016. Regarding Brexit, a delay to January 31 is all but inevitable -- assuming, that is, PM Johnson's ongoing threat to leave without a deal on October 31 is a grand bluff to maximise his people vs parliament narrative ahead of the upcoming general election (date TBC). A memo from No.10 conveniently found its way to the pro-Brexit Spectator magazine, showing the government to be musing threats to EU states supporting a Brexit delay and ideas on how to scupper the Benn bill (the new law blocking a no-deal Brexit on October 31), looks to be all part of the bluster. It would be politically risky for Johnson to try and force a no-deal exit through at the end of the month, as he would then go into a general election amid what even hardline Brexiteers must know would be a chaotic backdrop. The UK would have suddenly severed itself from over 750 separate agreements worldwide (according to FT research), requiring re-negotiation at not only the UK-EU level but also deal-by-deal authorisation of every third country involved, all at a time when UK imports get more expensive and UK exports more dear as the country shifts to backstop WTO trading terms. It makes far more sense for Johnson to keep pushing the people vs parliament line while making a show that he is doing all he can to bring about a Brexit on schedule, then blaming the delay on the pesky pro-EU parliamentarian elite. Polls suggest that Johnson's Conservative Party stands as favourite heading into the election. There is speculation that he and his Cabinet are thinking of making a no-deal Brexit the Conservative Party's official position going into the election, aiming at siphoning votes back from the Brexit Party, though this may also risk putting off less ideological Brexit voters. While the Conservatives are leading the polls, the pro-EU parties are strategising electoral pacts and alliances, and will be a force to be reckoned with as the electorate will be viewing the election as a pro-Brexit vs pro-EU shoot out. Polls suggest there is about 52% support for remaining in the EU versus 48% against -- the mirror image of the vote in 2016.

    [USD, CHF]
    EUR-CHF has settled lower after last week printing a two-week-plus high at 1.0979, which extended 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 rebounding 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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