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By XE Market Analysis December 27, 2019 6:52 am
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    XE Market Analysis: North America - Dec 27, 2019

    The dollar has declined against a backdrop of coursing risk-on sentiment in global equity markets with investors anticipating the U.S.-China phase-1 trade deal to be signed-off on soon, which will come amid a world of expansive monetary policy and benign inflation. In forex markets, the narrow trade-weighted USD index (DXY) dropped nearly 0.5% to an 10-day low at 97.18, while EUR-USD concurrently posted an nine-day high at 1.1149. USD-JPY saw a modest downward drift, although in context of overall narrow ranges, with the pair maintaining a consolidation pattern below the seven-month high seen in early December at 109.72. Dollar weakness floated Cable to a three-day high, at 1.3023, while the pound lost a little ground to the euro. The new president of the European Commission, von der Leyen, put out a not-unreasonable dose of Brexit reality by arguing in an interview with Les Echos that it will take longer than 11 months for the EU and UK to reach a new trade agreement. This comes after UK PM Johnson last week pitched that a deal would be done by the end 2020. We are taking the view that Johnson will eventually back down and allow for an extension in the post-Brexit transition period. Elsewhere, AUD-USD posted a fresh five-month high at 0.6955. In news, the BoJ published its summary of opinions from its December board meeting, which noted that it was appropriate to current maintain policy and not increase stimulus. Data showed a drop in Japanese industrial production, though unemployment also fell which inflation ticked higher. In Europe, the ECB's monthly bulletin noted "signs of stabilisation" while BTPs wobbled after a ministerial resignation in Italy.

    [EUR, USD]
    EUR-USD has continued to ply narrow ranges below the eight-month high seen in the immediate wake of the UK election last week, at 1.1199. EUR-JPY and EUR-CHF have traded lower after seeing respective a six-month and six-week 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 early 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 is consolidating below the seven-month high seen in early December, at 109.72, which was 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. The main U.S. equity indices last week hit fresh record highs. European and Asian markets, along with other global markets, have also remained buoyant, near trend highs. Anticipation of the U.S.-China trade deal and recent data showing a steadying in global growth following a recent soft patch have been maintaining a risk-on sentiment in global markets. We retain a bullish view of USD-JPY. 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 in trade-weighted terms remains down by about 8.5% from levels prevailing ahead of the vote to leave the EU in 2016. Brexit will now happen at the end of January, and the UK will enter a 11-month transition period before leaving the EU outright at the end of 2020. Most trade experts think this is too sort a time frame for a new trading deal between the UK and EU to be achieved, let alone establish global trade deals. We anticipate that the Breixt rubber hitting the road will curtail the pound's upside potential in 2020. Glimpses of certain post-Brexit realities the UK will face have been surfacing, with leaked papers form U.S.-UK trade talks showing that the Trump administration is demanding the UK not to mention climate change in any trade negotiations ahead. The U.S. is warning the UK not to give China's Huawei access to the provisioning of 5G networks for security reasons, which could also be conditional on winning any trade deal. The U.S. is more broadly pressuring the UK into as hard a Brexit as possible, with the leaked documents (as cited by Global Justice) stating: "USTR [US Trade Representative] were also clear that the UK-EU situation would be determinative: there would be all to play for in a No Deal situation but UK commitment to the Customs Union and Single Market would make a UK-U.S. FTA a non-starter." A major choice the UK government will have to make is how close a relationship, and how big a trade deal, it wants with the EU. The bigger the trade deal, and closer the regulatory alignment is between the UK and EU, the less scope there is for a big deal with the U.S., and vice versa. This will likely emerge as a major theme in 2020.

    [USD, CHF]
    EUR-CHF has settled in the upper 1.08s after yesterday posting a new one-month low at 1.0867, which is the culmination of quite a sharp drop from the seven-week peak of December 13, 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 last week implied that the no-deal threat was still an option.

    [USD, CAD]
    USD-CAD has found a footing after a near three-week phase of decline from levels above 1.3300. The pair on Friday printed a rebound-high at 1.3181, though this wasn't enough to prevent a fourth consecutive down week being logged. The Canadian dollar has over the last month 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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