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By XE Market Analysis December 5, 2019 7:48 am
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    XE Market Analysis: North America - Dec 05, 2019

    The dollar has traded mixed so far today, losing ground the pound, which continued to outperform as markets factor in a Conservatives-with-majority outcome in next week's general election in the UK, holding near steady versus the euro, gaining on the yen, which retained a heavy tone amid a backdrop of buoyant stock markets. The dollar also lost further ground to the Canadian dollar, which extended the sharp gains of yesterday following a 4% rally in oil prices. The biggest loser today was the Australian dollar, following sub-forecast retail sales and trade data out of Australia.

    [EUR, USD]
    EUR-USD remains mired narrow range trading around 1.1080-90 after running to a one-month high at 1.1116 yesterday. The pair looks to have found a better underpinning following a run of sub-forecast U.S. November data readings (manufacturing and services PMI reports, ADP private payrolls). The data has whittled the yield advantage of U.S. Treasuries versus Bunds, though an unexpected decline in German October manufacturing orders provided a timely indicator of the headwinds that continue to bear down on Europe. Sterling gains and the increasing likelihood of the UK Brexiting with a deal have also been indirectly support of the euro, which has posted gains versus the Swiss franc, the yen and the Australian dollar, aside from advancing against the U.S. dollar today.

    [USD, JPY]
    The yen has sunk to fresh lows versus the dollar and some other currencies. USD-JPY printed a two-day peak at 108.99, extending the rebound from yesterday's two-week low at 108.43. EUR-JPY also saw a two-day high, while GBP-JPY posted a seven-month high, aided along by sterling outperformance. AUD-JPY, in contrast, is softer, with the Aussie dollar being dragged broadly lower by a sharp break lower in the AUD-NZD cross, driven by an unusual divergence in RBA versus RBNZ policy expectations, magnified today by disappointing retail sales and trade data out of Australia. Global stock markets have remained buoyed by yesterday's Bloomberg report, which cited U.S. sources with familiarity of the trade discussions saying that progress is being made for a phase-1 deal being struck before December 15 (when further U.S. tariffs on Chinese imports is scheduled). The principal directional driver of the yen will likely to remain the ebb and flow of risk appetite in global markets. This will keep developments on the U.S.-Chine trade front will be front and centre. Assuming the phase-1 deal comes (eventually) to fruition, and with the U.S. economy enjoying what looks like a goldilocks economy -- growth slower, but still holding comfortably in positive expansion with inflation remaining benign -- then more upside would likely be seen in USD-JPY, as this would be a backdrop that would maintain Japan's yield-hungry investors confidence in foreign investments.

    [GBP, USD]
    Cable has printed a seven-month high at 1.3147 and EUR-GBP a two-and-a-half-year low at 0.8340. Sterling has been continuing to unwind its Brexit discount at a pace. With just a week to go until the UK's general election, it's looking increasingly unlikely that Labour will close the popularity gap with PM Johnson's Conservative party. Politico's poll track has the Conservatives with 43% support, unchanged from Monday, and Labour with 33% support, also unchanged from Monday. The gap is seen as being beyond the margins of error in polling methodology, and sufficient to return Johnson as prime minister with a working majority. The pound in the BoE's real trade-weighted measure remains 8% down on levels prevailing ahead of the vote to leave the EU in June 2016, having rallied by just over 9% from the multi-decade low that was seen in mid August. Assuming the Conservatives win and return to the House of Commons with a working majority, the Brexit deal will almost certainly be ratified and Brexit will be delivered in January. The UK would then enter a one-year transition period, which would likely be extended for up to two years beyond that, to allow time for a trade deal to be negotiated between the UK and EU (negotiations to date have focused on divorcing terms). During this period, not much will change in practical terms, with the UK remaining in the EU's single market and customs union. While the pound, in this scenario, will likely remain bid, there are reasons not to be get too bullish on the UK currency, one being the risks of the UK devolving, and another being realities of trying to strike trade deals in a more protectionist world.

    [USD, CHF]
    EUR-CHF has rebounded back above 1.0950 after hitting a three-week low yesterday at 1.0921. The low was the culmination of a three-day drop from the one-month high seen last week at 1.1027. The cross has been correlating with the ebb and flow of global stock markets, with the franc retaining a function as a safe haven currency despite the -0.75% deposit rate in Switzerland.

    [USD, CAD]
    The Canadian dollar has extended gains seen yesterday, which were concurrent with a 4% surge in oil prices. USD-CAD has hit a one-month low at 1.3175. The drop took out the low seen at 1.3254 on November 22, which was set after BoC Governor Poloz stated that interest rates are "about right," which was taken as a partial walk-back of recent dovish signalling from the central bank. The pairing is continuing to trade near the midway point of a broadly, at times choppy, sideways range that's been seen since July 2018. More of the same looks likely.

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