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By XE Market Analysis December 20, 2019 7:41 am
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    XE Market Analysis: North America - Dec 20, 2019

    The dollar has continued in directionally mixed trading, gaining versus the euro and New Zealand dollar, which has underperformed amid position trimming in thin markets ahead of the Christmas and new-year holiday period, while holding flat against the yen, and losing ground to the Canadian and Australian dollars, and, to a lesser extent, the pound, which failed to hold on to gains seen following above-forecast UK Q3 GDP data. EUR-USD ebbed under 1.1100 for the first time in nine days and posting a lower low for a third consecutive day. The move has been driven by broader euro weakness, with the common currency coming under pressure against other main currencies. EUR-AUD, for instance, descended into one-month lows, while EUR-CHF dropped over 25 pips to a 1.0875 low, swinging yesterday's one-month low at 1.0867 back into the scopes. A 40-pip plus slide in EUR-GBP appears to have been a factor, following above-forecast UK GDP data, amid some pre-Christmas position trimming in thin markets, although Cable unwound all of its post-data highs. USD-JPY continued to ply a narrow range in the lower 109.0s. The pair is consolidating below the seven-month high at 109.72, seen in early December, which is the culmination of a rally from the late-August low at 104.45, a three-year low. Rallying global equity markets and a pricing-out of Fed easing expectations have been keeping USD-JPY buoyant. USD-CAD has been in rebound mode following a near three-week phase of decline from levels above 1.3000. The pair has printed a two-day high at 1.3141 in what is the first back-to-back daily gain since late November, though still looks set to post a fourth consecutive down week, needing to close today below 1.3166 to achieve this.

    [EUR, USD]
    EUR-USD has ebbed under 1.1100 for the first time in nine days and posting a lower low for a third consecutive day. The move has been driven by broader euro weakness, with the common currency coming under pressure against other main currencies. EUR-AUD, for instance, has descended into one-month lows, while EUR-CHF dropped over 25 pips to a 1.0875 low, swinging yesterday's one-month low at 1.0867 back into the scopes. A 40-pip plus slide in EUR-GBP appears to have been a factor, following above-forecast UK GDP data, amid some pre-Christmas position trimming in thin markets, although Cable has turned lower from post-data highs. 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 1.1199. 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 continued to ply narrow ranges, though the pair still managed to scratch out a six-day high at 109.68 during the Tokyo session, which is 2 pips shy of the 17-day high seen last Friday, and 4 pips shy of the seven-month peak seen on December 2. We are bullish. 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 edged out fresh intraday highs in the wake of UK data showing an unexpected nudge higher in final Q3 GDP data, to growth rates of 0.4% q/q and 1.1% y/y, up on the respective preliminary estimates for 0.3% and 1.0%. Cable made a high at 1.3049, up by about 25 pips form the levels prevailing at the London interbank open, before settling back in the lower 1.3000s as markets trim position ahead of the Christmas and new-year holiday period (interbank and buy-side staffing levels will go skeletal in London after today through to the new year). Cable looks set to close out today with its biggest weekly loss in just over two years, having lost nearly 4% since last week's high. While the BoE said yesterday at the conclusion of its final policy meeting of the year that gradual and modest tightening in monetary policy may be needed over the forecast horizon, the policymakers still highlighted that both global and Brexit risks remain. With regard to Brexit, prime minister Johnson's implied revival of the threat to leave the the EU without a deal has obliged markets to factor back in a discount on the UK currency. The UK election has also elevated the issue of UK devolution, with Scottish nationalists having won 81% of the parliamentary seats in Scotland and Northern Ireland seeing nationalist members of parliament outnumber unionist for the first time in history. We are of the view that Johnson isn't serious about a no-deal Brexit, which, to recap, would take the economy out of world's biggest free trade area, and out of the 40 trade agreements with 70 other countries that membership of the EU provides, and switch overnight to much less favourable WTO trade terms while simultaneously endeavouring to renegotiate over 750 treaties with over 160 non-EU countries. Ultimately we think the government will opt for a close relationship and close regulatory alignment with the EU for the reason that size and proximity matter when it comes to trade, especially as this would best preserve London as a the world's biggest financial centre.

    [USD, CHF]
    EUR-CHF has remained heavy since posting a new one-month low at 1.0867 yesterday, which is the culmination of quite a sharp drop from the seven-week peak of last Friday, at 1.1033. The high was seen on news of the strong election victory of the Conservative Party at the UK's election, though the euro, tracking sterling, came back under pressure after UK PM Johnson this week implied that the no-deal threat was still an option.

    [USD, CAD]
    USD-CAD has been in rebound mode following a near three-week phase of decline from levels above 1.3000. The pair has printed a two-day high at 1.3141 in what is the first back-to-back daily gain since late November. USD-CAD needs to close out today below 1.3166 to wrack this week up as the fourth consecutive down week. 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 this month also weighed on USD-CAD. Another supportive factor for the Canadian currency is higher oil prices, which up be over 10% from the lows seen in late November. USD-CAD looks likely to continue to trade with a downside bias.

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