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By XE Market Analysis October 28, 2019 4:18 am
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    XE Market Analysis: Europe - Oct 28, 2019

    USD-JPY edged out an 11-day high at 108.79, surpassing Friday's high by 2 pips. The New Zealand dollar also saw an 11-day low versus the U.S. currency, while the Canadian dollar nudged just below the low it saw against the U.S. buck on Friday. Ranges have been narrow, while most of the other main currency pairings and cross rates remained comfortably within respective Friday ranges. Asian stock markets rallied, underpinned by the Trump administration stating that that U.S. and Chinese trade negotiators had "made headway on specific issues." The S&P 500 posted a record high on Friday. Over the last week, the biggest net change among the main currencies is GBP-USD, which is down by a net 1.1%, reflecting sterling underperformance. The UK currency is down by 0.9% against the yen over this time, and by 0.5% versus the euro. A snarling up in the Brexit process weighed on the pound, though weekend developments should encourage. The EU is set to sign off on an extension to January 31 2020 with an option for the UK to leave earlier if a deal is ratified, according to a leaked draft of the agreement seen by the Guardian. Liberal Democrats and the Scotland's SNP have also agreed to table a bill in which they would back a general election on December 9. Today, the UK government will table a motion call for a general election, but it it set to fail given Labour's opposition to it. As and when the EU confirms the three-month Brexit extension the UK government cannot, by law, implement a no-deal exit from the EU on October 31 (Thursday). The other major focus this week is the Fed's two-day FOMC, which will announce policy on Wednesday. The FOMC is widely expected to cut rates 25 bps to a 1.50% to 1.75% band, and we expect the Fed will indicate that this is another "insurance move" as the economy doesn't warrant any help. Such guidance would likely given the dollar a lift as there is about a 28% probability priced in to Fed fund futures for an additional 25 bps cut in December.

    [EUR, USD]
    EUR-USD declined by about a net 0.5% last week in settling just below 1.1100, which corrected some of the gains seen in the prior three weeks, from levels below 1.0900. Brexit develops have been buffeting the euro somewhat. Despite last week's loss, the pair remains about 1.4% up on month-ago levels reflecting the pricing out of no-deal Brexit risk on October 31, which had been posing a threat to the Eurozone economy. The Brexit saga is far from over, however, and there remains a theoretical risk of a no-deal scenario, although now further down the track. ECB's Draghi, at his final policy meeting last week, left both policy and guidance unchanged. Incoming President, Christine Lagarde, is expected to bring a more dovish tilt to the central bank. The Fed meets on monetary policy this week (announcing Wednesday) where a 25 bps has been fully discounted, and where the focus will be on guidance. We expect the Fed will indicate that this is another "insurance move" as the economy doesn't warrant any help. Such guidance would likely given the dollar a lift as there is about a 28% probability priced in to Fed fund futures for an additional 25 bps cut in December. Taking a step back, we still class EUR-USD as being amid a bear trend that's been unfolding since early 2018, from levels around 1.2500. The trend has coincided with the 10-year Bund yield dropping from levels over 0.70% to the prevailing -0.350% yield (a -0.739% low was seen in early September).

    [USD, JPY]
    USD-JPY edged out an 11-day high at 108.79, surpassing Friday's high by 2 pips, while EUR-JPY, AUD-JPY and most of the other main yen crosses have remained within their respective Friday ranges. The yen will remain directionally sensitive to global stock market performance. Asian stock markets rallied today, underpinned by the Trump administration stating that that U.S. and Chinese trade negotiators had "made headway on specific issues." The S&P 500 posted a record high on Friday. USD-JPY remains a short distance from the 12-week high seen earlier in the month at 108.94. The BoJ policy meeting this week (concluding Thursday) is in scope. Reuters cited sources saying that policymakers are leaning towards keeping monetary policy unchanged given the apparent truce in U.S.-China trade warring and with financial markets steady. The BoJ last week warned today about riskier lending practices of financial firms as a consequence of super accommodative monetary conditions.

    [GBP, USD]
    The UK currency started the week showing a net loss of 1.1% against the dollar from week-ago levels, and respective declines of 0.9% and 0.5% against the yen and euro over this time. A snarling up in the Brexit process weighed on the pound, though weekend developments should encourage. The EU is set to sign off on an extension to January 31 2020 with an option for the UK to leave earlier if a deal is ratified, according to a leaked draft of the agreement seen by the Guardian. Liberal Democrats and the Scotland's SNP have also agreed to table a bill in which they would back a general election on December 9. Today, the UK government will table a motion call for a general election, but it it set to fail given Labour's opposition to it. As and when the EU confirms the three-month Brexit extension the UK government cannot, by law, implement a no-deal exit from the EU on October 31 (Thursday).

    [USD, CHF]
    EUR-CHF has been lifted recently by the diminishing in no-deal Brexit risks, which has been supportive of the euro. The cross last week printed a two-and-a-half-month high at 1.1059 and has since remained buoyant.

    [USD, CAD]
    USD-CAD has posted a modest rebound, today edging above Friday's high in making a peak at 1.3078. The pair is fractionally down from week-ego levels, and is off by 1.3% from month-ago levels. Recent declines have been concomitant with near 11% rally in oil prices from early October lows, which is a positive lead for the Canadian dollar. An improvement in risk appetite in global markets has been at play, which has lifted the commodity-correlating dollar bloc currencies. The truce in U.S.-China trade warring and the ruling out of a no-deal Brexit scenario on October 31, have been positives for investor sentiment. A one-year low at 1.3016, seen back in July, provides a downside focal point for USD-CAD.

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