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By XE Market Analysis October 30, 2019 4:52 am
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    XE Market Analysis: Europe - Oct 30, 2019

    The dollar has been trading softer versus the Australian dollar, euro and sterling, while holding steady in narrow ranges against the yen and Canadian dollar, among other currencies. Political developments in the UK have, 1, put on a general election for December 12, and 2, prevented the spectre of a so-called 'zombie' parliament, with the Labour Party having decided to back down from blocking an election. These developments have helped both the pound and the euro retain their buoyancy against most other currencies. Cable is presently settled in the upper 1.2800s after posting a six-day high at 1.2904. The Brexit saga is not over, and all options remain open, from a no-deal Brexit to Brexit-cancelled, depending on the election results. PM Johnson's Conservative Party has a 13 point lead on the Labour Party, though this election is highly unusual and many political pundits in the UK have been emphasizing there is a high level of unpredictability. Small parties are likely to play a much bigger role than normal with voting pacts among opposition parties aiming to ensure that the pro-EU vote isn't split. There is also a risk of a hung parliament -- a political stalemate -- which would in this scenario likely lead to there being a second referendum on EU membership. Elsewhere, EUR-USD has edged out a fresh five-day high at 1.1119. The Australian dollar has retained a perky tone, and is registering as the strongest of the main currencies over the last week, and is up by a respective 2.5% and 3.6% against the dollar and yen from month-ago levels, reflecting the recent recovery in risk appetite over this time. This trend may be in jeopardy, however, with a major sticking point in U.S.-China trade talks coming to light, with sources cited by Reuters reporting that Beijing is baulking at the level of purchases of agricultural products the U.S. is demanding. Aside from this, markets are focusing in on the Fed's policy announcement today, particularly the central bank's guidance following an expected 25 bps rate cut. The CME's FedWatch Tool shows markets are currently discounting 22% odds for a follow up 25 bps cut at the December 11th FOMC. We are expecting Fed chair Powell to indicate that today's cut is an insurance move, which will dampen any perceptions that the Fed is amid a committed easing cycle, and which in turn could give the dollar a boost.

    [EUR, USD]
    The euro has been trading with buoyancy, overall, benefiting from the political developments in the UK. EUR-USD has edged out a fresh five-day high at 1.1119, and EUR-JPY has lifted into six-day high terrain. Markets are now focusing in on the Fed's policy announcement today, particularly the central bank's guidance following an expected 25 bps rate cut. The CME's FedWatch Tool shows markets are currently discounting 22% odds for a follow up 25 bps cut at the December 11th FOMC. We are expecting Fed chair Powell to indicate that today's cut is an insurance move, which will dampen any perceptions that the Fed is amid a committed easing cycle, and which in turn could give the dollar a boost. Juxtaposed to the view that incoming ECB President, Christine Lagarde, is expected to bring a more dovish tilt to the central bank, this makes us bearish of EUR-USD. We still class the pairing 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 -0.342% yield (a -0.739% low was seen in early September).

    [USD, JPY]
    The yen has been trading mixed so far today, edging out fresh lows against the euro and Australian dollar while posting moderate gains versus the dollar. The performance of the Japanese currency over the last month has been telling, showing a averaged loss of 3.3% against the dollar, euro, sterling and the Aussie dollar over this time frame. This has reflected the recent recovery in risk appetite over this time, which has culminated in the S&P 500 hitting record highs and Japan's Nikkei 225 ascending into one-year high territory. The yen has a long standing inverse correlation with global stock market direction (there are causational factors). This trend may be in jeopardy, however, with a major sticking point in U.S.-China trade talks coming to light, with sources cited by Reuters reporting that Beijing is baulking at the level of purchases of agricultural products the U.S. is demanding. Remember that the prior 12 rounds of negotiations between the two sides over the last year and a half have ended in disappointment. There are narratives that Beijing, despite a weakening economy and the disruptions in Hong Kong, is practising strategic patience into next year's presidential election in the U.S., showing that it is engaging in trade talks while not giving what the Trump administration wants. In so far as this may see a return of risk aversion in global markets, this could see the yen appreciate against the dollar and most other currencies.

    [GBP, USD]
    The pound has been holding firm. Political developments in the UK have, 1, put on a general election for December 12, and 2, prevented the spectre of a so-called 'zombie' parliament, with the Labour Party having decided to back down from blocking an election. Cable is presently settled in the upper 1.2800s after posting a six-day high at 1.2904. The Brexit saga is not over, and all options remain open, from a no-deal Brexit to Brexit-cancelled, depending on the election results. PM Johnson's Conservative Party has a 13 point lead on the Labour Party, though this is election is highly unusual and many political pundits in the UK have been emphasizing there is a high level of unpredictability. Small parties are likely to play a much bigger role than normal with voting pacts among opposition parties aiming to ensure that the pro-EU vote isn't split. There is also a risk of a hung parliament -- a political stalemate -- which would in this scenario likely lead to there being a second referendum on EU membership. Overall, we don't advise taking a bullish view of the pound at this juncture.

    [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 rebounded to 1.3100 before capping out, and Monday's three--month low at 1.3042 remains in play. 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% low-to-high 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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