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By XE Market Analysis December 18, 2019 9:08 am
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    XE Market Analysis: North America - Dec 18, 2019

    The dollar has traded moderately firmer against most currencies, which lifted the narrow trade-weighted USD index (DXY) to a six-day high at 97.36. This extends the rebound in the USD index from the five-and-a-half-month low that was seen last Thursday, at 96.59. A 3% decline in Cable from the post-UK election high has been the prime driver in the rebound in the U.S. currency as measured by the DXY index. EUR-USD has also traded, softer, with the euro coming under broader pressure, along with the pound, after the UK prime minister effectively rekindled the no-deal Brexit threat by pledging to outlaw any extension in the post-Brexit transition period beyond 2020 (although many observers, including ourselves and S&P Ratings, see that Johnson would be apt to reverse track further down the road in order to buy time to hammer out a new trade agreement with the EU). EUR-USD ebbed to a two-day low at 1.1126, drifting back to the lower end of an overall narrow range that's been seen after an eight-month high was posted last week in the immediate wake of the UK election last week, at 1.1199. EUR-JPY and EUR-CHF have also traded lower after seeing respective a six-month and six-week highs, with EUR-CHF posting one-month lows earlier, under 1.0910. The pound settled in London trading after posting fresh correction lows against the dollar and euro, among other currencies, ahead of the open in Europe in Asia. Cable printed a six-day low at 1.3072, and EUR-GBP a two-week high at 0.8517. Elsewhere, USD-JPY ebbed below 109.50 after posting a two-week high at 109.70 on Friday.

    [EUR, USD]
    EUR-USD has ebbed to a two-day low at 1.1126, drifting back to the lower end of an overall narrow range that's been seen after an eight-month high was posted last week in the immediate wake of the UK election last week, at 1.1199. EUR-JPY and EUR-CHF have also traded lower after seeing respective a six-month and six-week highs, with EUR-CHF posting one-month lows earlier, under 1.0910. EUR-USD has been trending lower since early 2018, dropping from levels near 1.2500 and posting a 32-month low at 1.0879 in earlier October, the current nadir of the trend. The pair has since settled in a range marked by 1.0981 and 1.1179. The pricing out of further Fed tightening, after the central bank hiked rates three times, has taken the wind out of the sails of the dollar. The pair will enter 2020 without strong directional impulse. The U.S. economy has been holding up, while the Eurozone economy has stabilized following a soft patch.

    [USD, JPY]
    USD-JPY has ebbed below 109.50 after posting a two-week high at 109.70 on Friday. We are bullish of this pairing heading into 2020. The U.S. is enjoying what looks like a goldilocks economy -- growth slower, but still holding comfortably in positive expansion with inflation remaining benign -- while the risk-on vibe in global markets should maintain Japan's yield-hungry investors' confidence in foreign investments.

    [GBP, USD]
    The pound has settled in London trading after posting fresh correction lows against the dollar and euro, among other currencies, ahead of the open in Europe in Asian. Cable printed a six-day low at 1.3072, and EUR-GBP a two-week high at 0.8517. The UK currency is trading below the levels prevailing ahead of the election result last week, have declined by just over 3% versus the dollar from the highs, and by over 2.5% in the case against the euro. This follows UK prime minister Johnson's revival of the no-deal Brexit threat yesterday, by pledging to modify the EU withdrawal agreement so that it legislates against any extension in the post-Brexit transition period beyond 2020. We doubt he's serious, and such legislation could easily be reversed at will, given Johnson's commanding parliamentary majority. His aim is clearly to strengthen his government's negotiation hand with the EU, by arming it with a "walk away" option during upcoming negotiations for a new trade deal, though in reality he is speaking more to a domestic audience, putting on a show of intent for the pro-Brexit voters. Brussels will know he is bluffing, as the reality of leaving the EU without a deal would have far greater negative economic consequences on the UK than it would the EU. What is clear is that a new trade deal should be able to be drawn up relatively quickly, though the 11 months still looks to be a tall order (witness the 17 months it took for the U.S. and China to come up with a partial revision in the two's trading terms). Unlike all of the other negotiations the EU has to date had with other nations and trading blocs, where they were starting a long way apart (totally different tariffs, quotas and systems), the UK and EU have 100% common features.

    [USD, CHF]
    EUR-CHF has settled lower after spiking on Friday 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 has settled near 1.3150 after printing a six-week low at 1.3115 on Monday, which made this the fourth consecutive week of declines. The Canadian dollar has been benefiting from positive developments on both the USMCA and U.S.-China trade fronts. The Fed's removing a forecast for a 25 bps hike in 2020 at its FOMC policy meeting last week also weighed on USD-CAD. Another supportive factor for the Canadian currency is higher oil prices, which are showing a near 9% gain from the lows seen in late November. Assuming there are no upsets on the trade front, USD-CAD looks likely to continue to trade with a downside bias.

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