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By XE Market Analysis October 29, 2019 4:20 am
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    XE Market Analysis: Europe - Oct 29, 2019

    The yen ebbed to fresh lows against a number of currencies as market positioning continue to skew away from the safe haven currency. USD-JPY eked out a fresh three-month high at 109.06, while EUR-JPY and AUD-JPY lifted to respective five- and eight-day highs. GBP-JPY also edged out a five-day peak. This price came with the Nikkei 225 hitting a fresh one-year high, and the S&P 500 posting a new record high yesterday on Wall Street ,with a risk-on vibe in global markets being stoked by trade hopes, the avoidance of a no-deal Brexit crash on October 31, positive corporate earnings, and a anticipated Fed rate cut tomorrow. On the U.S.-China trade front, President Trump said that phase 1 trade talks with China were "ahead of schedule." The commodity-correlating dollar-bloc currencies remained underpinned. AUD-USD printed a one-week high, at 0.6859, and USD-CAD remained heavy, near yesterday's three-month low at 1.3049. Elsewhere, EUR-USD settled to an oscillation around 1.1100, and Cable held comfortably within yesterday's range. On the Brexit front, PM Johnson's government failed to win two-thirds majority for early ballot needed under Fixed-term Parliaments Act to secure a general election. In response, Johnson said that he will now not bring back the Brexit deal in the currency parliament, and that he will work with the Liberal Democrats and SNP parties to change the law that would allow an election to be called with a simple majority (rather than a two-thirds super majority). As things stand, a pre-Christmas election is looking likely, though legislation for this will have to pass as soon as Thursday if the election is to be staged on the preferred December-9 date of the LibDems and SNP.

    [EUR, USD]
    EUR-USD settled to an oscillation around 1.1100, consolidating after losing about 0.5% last week, which corrected some of the gains seen in the prior three weeks, from levels below 1.0900. Despite last week's loss, the pair remains up by over 1.5% from 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 will today begin its two-day monetary policy meeting, 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]
    The yen ebbed to fresh lows against a number of currencies as market positioning continue to skew away from the safe haven currency. USD-JPY eked out a fresh three-month high at 109.06, while EUR-JPY and AUD-JPY lifted to respective five- and eight-day highs. GBP-JPY also edged out a five-day peak. This price came with the Nikkei 225 hitting a fresh one-year high, and the S&P 500 posting a new record high yesterday on Wall Street ,with a risk-on vibe in global markets being stoked by trade hopes, the avoidance of a no-deal Brexit crash on October 31, positive corporate earnings, and a anticipated Fed rate cut tomorrow. On the U.S.-China trade front, President Trump said that phase 1 trade talks with China were "ahead of schedule." For now, we expect further upside in USD-JPY. July's five-month peak at 109.32 provides an upside focal point.

    [GBP, USD]
    Cable has been holding comfortably within yesterday's range so far today. On the Brexit front, PM Johnson's government failed to win two-thirds majority for early ballot needed under Fixed-term Parliaments Act to secure a general election. In response, Johnson said that he will now not bring back the Brexit deal in the currency parliament, and that he will work with the Liberal Democrats and SNP parties to change the law that would allow an election to be called with a simple majority (rather than a two-thirds super majority). As things stand, a pre-Christmas election is looking likely, though legislation for this will have to pass as soon as Thursday if the election is to be staged on the preferred December-9 date of the LibDems and SNP. Johnson's Conservative Party is leading in the polls by 13 points (according to Politico's poll tracker), though voting pacts among opposition parties will pose a threat to Boris, while many political pundits in the UK are emphasizing that this election will be risky for the government, despite its poll lead, coming at a volatile time. All possibilities remain open with regard to how Brexit becomes resolved, ranging form no-deal (on January 31), to a deal with multi-year transition period, to a second referendum, to a Brexit being cancelled scenario. This backdrop should keep the pound's upside in check.

    [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 remained heavy since posting a three--month low at 1.3029 yesterday. The fresh lows mark this week up as the fourth consecutive week of lower lows, which has drawn in the one-year low seen in July at 1.3016. 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 given the impact on the Canadian economy's terms of trade. We advise trend following with regard to USD-CAD.

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