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By XE Market Analysis October 31, 2019 5:23 am
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    XE Market Analysis: Europe - Oct 31, 2019

    The dollar has extended its post-Fed declines, which has seen the narrow trade-weighted USD index (DXY) print a one-week high at 97.29. EUR-USD pegged a 10-day high at 1.1170, Cable a one-week high at 1.2944, and AUD-USD a new three-month peak at 0.6929, extending the rise from the major trend lows seen in early October to 3.9%. The Fed trimmed rates by 25 bps, as had been widely expected, and successfully pulled off a 'dovish pause' forward guidance by stressing that tightenings are off the table, with Chair Powell indicating the FOMC won't even consider rate hikes until inflation is back at the 2% target. That was more than sufficient for Treasuries and Wall Street to rise, and the dollar to fall, even though the Fed appears to have hit the pause button on easings for the rest of the year. Powell stressed that the current stance looks appropriate, and won't be changed unless there's a "material reassessment" of conditions. Elsewhere, dollar weakness pushed USD-JPY to a six-day low at 108.58. The BoJ left policy unchanged today, as had been widely anticipated, but made a slight but distinct strengthening in dovish guidance, stating that it expects short- and long-term interest rates "to remain at present or lower levels as long as needed to pay close attention to the possibility that the momentum toward achieving its price target will be lost," dropping the line in the previous statement that it was committed to ultra-low rates "at least until the spring of 2020." The BoJ also trimmed inflation forecasts.

    [EUR, USD]
    EUR-USD pegged a 10-day high at 1.1170, which is the culmination, so far, of dollar losses seen in the wake of the Fed's guidance on monetary policy yesterday. To recap, the Fed trimmed rates by 25 bps, as had been widely expected, and successfully pulled off a 'dovish pause' forward guidance by stressing that tightenings are off the table, with Chair Powell indicating the FOMC won't even consider rate hikes until inflation is back at the 2% target. This offset the Fed's apparent hitting of the pause button on easings for the rest of the year, with Powell saying that the current stance looks appropriate, and won't be changed unless there's a "material reassessment" of conditions. This has come with the euro having recently been buoyed by developments in the UK, that ruled out a no-deal Brexit scenario (for now). EUR-USD has now rallied for four consecutive days, drawing in on the 11-week peak seen on October 20. To note, ECB President, Christine Lagarde, is expected to bring a more dovish tilt to the central bank, and 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 -0.39% yield (a -0.739% low was seen in early September).

    [USD, JPY]
    USD-JPY fell to a six-day low at 108.53 following the Fed's 'dovish pause' guidance, and despite a dovish shift in the BoJ's policy guidance today. Japan's central bank left policy unchanged today, as had been widely anticipated, while enacting a slight but distinct strengthening in dovish guidance, stating that it expects short- and long-term interest rates "to remain at present or lower levels as long as needed to pay close attention to the possibility that the momentum toward achieving its price target will be lost," dropping the line in the previous statement that it was committed to ultra-low rates "at least until the spring of 2020." The BoJ also trimmed inflation forecasts. Incoming data out of Japan have, on the one hand, shown industrial production rising and retail sales lifting the most in over five years, but on the other hand, shown exports declining amid fallout from U.S.-China trade tensions. The biggest driver of yen direction is likely to remain global stock market performance, given the Japanese currency's long standing inverse correlation with global stock market direction (there are causational factors). An on this, the evolution of the U.S.-China trade dispute will be crucial. Beijing today proposed that it could cut tariffs on U.S. agricultural product imports in place of the specific levels of goods to buy as being demanded by the Trump administration. Sources cited by Reuters yesterday said that a major sticking point in U.S.-China trade talks was that China was baulking at the level of purchases of agricultural products the U.S. is demanding.

    [GBP, USD]
    Cable edged out a nine-day high at 1.2951, reflecting both a weaker dollar following the Fed's 'dovish pause' policy guidance and buoyancy of the pound. The Brexit deal is, for now, off the agenda with the political parties in the UK now gearing up for a December-12 general election. The UK currency is now showing a 5% averaged gain versus the dollar, euro and yen from month-ago levels versus, and is up by over 8% against the dollar from the major-trend low that was seen in early September. The gains reflect a partial unwinding in the Brexit discount markets have been demanding of the pound, though we estimate the currency is still trading with about a 8-9% discount in trade-weighted terms compared to levels prevailing just ahead of the vote to leave the EU in June 2016. 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 coming amid a highly unusual circumstance and many political pundits in the UK have been emphasizing there is a high level of unpredictability, despite what polls might suggest. 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 probably lead to a second referendum on EU membership as a last-resort means to bring Brexit to a conclusion. Overall, we don't advise following pound gains 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 rallied sharply over the last day with the BoC managing to out-dove the Fed, with GoC yields plunging after Canada's central bank opened the door wide to a near term rate cut, while delivering the as-expected steady rate announcement. The BoC observed that Canada has not been immune to the developments globally. USD-CAD spiked to a high of 1.3208 before settling in the mid 1.3100s. The pair remains up by about 1% from the three-month low seen earlier in the week at 1.3042. The tapering out of the recent 10%-plus rally in oil prices has also taken some support away from the Canadian currency.

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