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By XE Market Analysis December 13, 2019 7:30 am
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    XE Market Analysis: North America - Dec 13, 2019

    Sterling settled after surging over 2% versus the dollar, euro and yen (averaged) on the initial exit poll that accurately predicted the landslide win for the Conservative Party in the UK's general election. Key takeaways include, 1, the SNP dominated in Scotland, winning 81% of the seats there, meaning that there will be a vigorous push for Scottish independence; 2, the Brexit Party, as expected, didn't win a single seat, but syphoned votes away from Labour in many seats in the Midlands and the North of England; 3, the size of the Conservative Party's win is such that the influence of the hardcore Brexit faction of the party has been diluted, which should give PM Johnson leeway in his upcoming negotiations with EU on a future trade deal. Cable hit a 20-month peak of 1.3513, since settling near 1.3400. EUR-GBP hit lows last seen in July 2016. We expect the pound to remain underpinned for now. UK business investment will likely rebound as the fog of Brexit clears. With size and proximity mattering in trade, we also expect Johnson to opt for maintaining a close relationship with the EU. However, there are reason for caution. Aside from the issue of potential UK devolution, there will be the rubber-hitting-the-road reality of trying to replicate the trade deals that the UK had with the world's biggest free trade area, along with the 40 trade agreements the EU has with 70 countries. Elsewhere, hopes for a U.S.-China trade deal maintained a risk-on sentiment in global markets, which in forex markets translated as outperformance in dollar bloc currencies and underperformance in the yen. USD-JPY posted an 11-day high at 109.70, which is 2 pips shy of the early-December seven-month high. AUD-JPY, a forex market barometer of investor risk appetite, is at five-month highs, up nearly 0.5% on the day and by over 2% from week-ago levels. The euro, outside the case against the pound, rallied, being positively influence the UK election result, which heralds the end of Brexit uncertainty.

    [EUR, USD]
    The euro, outside the case against the pound, has rallied, being positively influence the UK election result, which heralds the end of Brexit uncertainty. EUR-USD posted a four-month high at 1.1199, while EUR-JPY saw a six-month peak and EUR-CHF a six-week high.

    [USD, JPY]
    The yen has printed fresh lows against the euro, Australian dollar and a number of other currencies, though USD-JPY edged out a two-day low in context of a less than 20-pip range. The declines in the Japanese currency come against the backdrop of global equity markets holding buoyant, although market optimism is guarded about the U.S. and China coming to an agreement on the partial phase-1 trade deal ahead of the U.S. scheduled tariff hike. 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]
    Sterling rallied by over 2% versus the dollar, euro and yen (averaged) in light of the unexpectedly large win for the Conservative Party in the UK's general election. With 649 of the 650 House of Commons seats declared, the Conservatives have 364 seats, a gain of 49 seats, versus Labour's 203, a loss of 59 seats. This is the best Conservative Party victory since 1987. Other key takeaways include, 1, the SNP have have dominated in Scotland, winning 83% of the seats there, meaning that there will be a vigorous push for Scottish independence (justified by the fact that Scotland strongly voted for remaining in the EU in 2016); 2, the Brexit Party, as expected, didn't win a single seat, but syphoned votes away from Labour in many seats in the Midlands and the North of England; 3, the size of the Conservative Party's win is such that, according to BBC analysis, the influence of the hardcore Brexit faction of the party has been diluted, which should give PM Johnson leeway in his upcoming negotiations with EU on a future trade deal (and will most likely extend the post-Brexit transition period beyond the end of 2020, despite his manifesto pledge not to). Cable hit a 20-month peak of 1.3513, since settling in the lower 1.3400s, up on the mid 1.3100s pre-election levels. EUR-GBP hit lows last seen in July 2016. We expect the pound to remain underpinned for now. UK business investment will likely rebound as the fog of Brexit clears. With size and proximity mattering in trade, we also expect Johnson to opt for maintaining a close relationship with the EU. However, there are reason for caution. Aside from the issue of potential UK devolution, which would be economically disruptive, there will be the rubber-hitting-the-road reality of trying to replicate the trade deals that the UK had with the world's biggest free trade area, along with the 40 trade agreements the EU has with 70 countries.

    [USD, CHF]
    EUR-CHF rallied to a six-week peak of 1.1033 on news of the strong election victory of the Conservative Party at the UK's election. This heralds the end of a protracted period of Brexit related uncertainty, which had been casting a pall over both the UK and European economies. The euro also posted gains against the dollar and yen, and most other currencies, with the main exception being the case against the pound.

    [USD, CAD]
    USD-CAD dropped to a near six-week low at 1.3151, with the Canadian dollar and its dollar-bloc brethren benefiting from positive developments on both the USMCA and U.S.-China trade fronts this week. The Fed's removing a forecast for a 25 bps hike in 2020 at its FOMC policy meeting this week also weighed on USD-CAD. Another supportive factor for the Canadian currency is higher oil prices, which are showing a near 5% gain from month-ago levels. Assuming there are no upsets on the trade front, USD-CAD looks likely to trade with a downside bias.

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