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By XE Market Analysis October 10, 2019 3:53 am
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    XE Market Analysis: Europe - Oct 10, 2019

    The dollar bloc currencies have lifted amid a cautious risk-on vibe in Asia, led by a rally on Chinese stock markets. AUD-JPY was showing a gain of about 0.5% as it printed a nine-day high at 72.81, while AUD-USD rallied to around the 0.6750 mark from the low 0.67s. USD-CAD retreated to the lower 1.3300s after posting a one-week high at 1.3345. Both the dollar and yen have been trading softer, which has nudged EUR-USD above 1.1000 for the first time in two weeks, and put EUR-JPY in 13-day high terrain. Investors appear to be giving out hope that both the U.S. and China are ready to strike a partial trade deal out of self-interest pragmatism, despite openly hostile relations between the two, which has been a recipe for some mixed messaging from both Washington and Beijing. Skittishness still hangs in the air, however, partly amid a nervousness that the U.S., UK and Eurozone economies might be headed for recession. Reflecting this, bullion-backed ETFs have now posted a 17 consecutive day rise in demand, the longest run of inflows since the financial crisis in 2008-9, with total gold ETF holdings now at record levels. On the Brexit front, UK Prime Minister Johnson will meet his Irish counterpart later today, which the media has tagged as a last-ditch attempt to reach a compromise on the Irish border issue, though more likely it is a stage for both to put on a show that there are doing all they can. Johnson yesterday pledged that he would not seek to make a no-deal Brexit the official party position heading into the upcoming election (date TBA).

    [EUR, USD]
    EUR-USD has lifted moderately amid a softer dollar, which has been concomitant with a mix of softening Treasury yields (amid a hefty phase of supply) and hopes that the U.S. and China will reach a partial trade deal. The pair rose above 1.1000 for the first time in two weeks. Both the Eurozone and U.S. economies are experiencing economic slowing, the former at a more advanced stage, near to tipping into recession. Bigger picture, 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 printed an eight-day high at 107.77, while yen crosses have been lifting, too. AUD-JPY and EUR-JPY rose into nine- and 13-day high terrain, respectively. The yen's underperformance has come with global stock markets managing to rise amid tentative hopes both the U.S. and China are ready to strike a partial trade deal out of self-interest pragmatism, despite openly hostile relations between the two, which has been a recipe for some mixed messaging from both Washington and Beijing. Skittishness still hangs in the air, however, partly amid a nervousness that the U.S., UK and Eurozone economies might be headed for recession. Reflecting this, bullion-backed ETFs have now posted a 17 consecutive day rise in demand, the longest run of inflows since the financial crisis in 2008-9, with total gold ETF holdings now at record levels.

    [GBP, USD]
    Sterling has been trading mixed, gaining against a generally soft dollar while see one-month lows in the case against the euro. 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. On the Brexit front, UK Prime Minister Johnson will meet his Irish counterpart later today, which the media has tagged as a last-ditch attempt to reach a compromise on the Irish border issue, though more likely it is a stage for both to put on a show that there are doing all they can given the intractable reality of their respective positions. Johnson yesterday pledged that he would not seek to make a no-deal Brexit the official party position heading into the upcoming election (date TBA). A delay in Brexit is all but inevitable. We assume 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 election. 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.

    [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 retreated to the lower 1.3300s after posting a one-week high at 1.3345. A basing price action in oil prices have returned some support to the Canadian dollar, or at least undermined the prime factor that had recently 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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