Home > XE Currency Blog > XE Market Analysis: North America - Dec 31, 2018

AD

XE Currency Blog

Topics6118 Posts6163
By XE Market Analysis December 31, 2018 6:23 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 4176
    XE Market Analysis: North America - Dec 31, 2018

    The Dollar has traded mixed in thin year-end conditions. Japan, mainland China and many European nations have been closed for holidays, while the London and Paris will be working a half day today. EUR-USD settled in the mid 1.1400s after earlier eking out a two-session low at 1.1421 amid a bout of Dollar firmness. USD-JPY clocked a fresh four-month low of 110.00, driven by Yen firmness despite a backdrop of rallying stock markets in Asia and Europe. S&P 500 futures have also rallied by more than 0.7%. President Trump said he had a "very good call" with China's Xi on Saturday, claiming that "big progress" was being made with regard to trade negotiations. Markets overlooked a big miss in China's official manufacturing PMI survey for December, which came in at a two-year low of 49.4 after 50.0 in November, undershooting the median forecast for 49.9. Heading into 2019, we are taking a more neutral view of the Dollar after being bullish for much of 2018. U.S. monetary policy has ceased to be a support, with Fed fund futures having now largely priced out any hike for 2019, and now implying a 25 bp cut by mid-2020.

    [EUR, USD]
    EUR-USD has settled in the mid 1.1400s after earlier eking out a two-session low at 1.1421 amid a bout of light year-end Dollar firmness. Heading into 2019, we are taking a more neutral view of the Dollar after being bullish for much of 2018. U.S. monetary policy has ceased to be a support, with Fed fund futures having now largely priced out any hike for 2019, and now implying a 25 bp cut by mid-2020. On the Euro side of the coin, there have been some conflicting forces, with signs of flagging economic growth momentum on the one hand, and a rally in Italian assets on the back of a mostly Brussels-appeasing budget (with a the lower originally planned deficit of 2.04% of GDP, rather than 2.4%, now passed by both the Senate and lower house), on the other. We see EUR-USD as having entered a broadly sideways range phase as markets continue to fathom the push of the populist political movement in Europe and the pull of a more neutral Fed policy stance. Support comes in at 1.1356-58, and resistance at 1.1439-40.

    [USD, JPY]
    USD-JPY has clocked a fresh four-month low of 110.03 in thin markets, with Tokyo having been closed today, and with many European centres out. The move has been driven by Yen firmness, despite a backdrop of rallying stock markets in Asia and Europe. S&P 500 futures have also rallied by more than 0.7%. President Trump said he had a "very good call" with China's Xi on Saturday, claiming that "big progress" was being made with regard to trade negotiations. The MSCI Asia-Pacific (ex-Japan) index rose over 0.5%, though remains some 16% for the worse on the year. Stock markets overlooked a big miss in China's official manufacturing PMI survey for December, which came in at 49.4 after 50.0 in November, undershooting the median forecast for 49.9. The reading points to the first contraction in the sector in two years. We take a bearish view of USD-JPY on the view that global stock market volatility will remain peaky well into 2019, seeing scope for deeper corrections after a near decade winning streak, with valuations needing to adjust to a world with less accommodative liquidity and slowing economic growth. Such a backdrop would maintain demand for the safe haven yen. U.S. monetary policy, meanwhile, has ceased to be a support for the dollar. Fed fund futures have now largely priced out any hike for 2019, and imply a 25 bp cut by mid-2020.

    [GBP, USD]
    The Pound has been trading without domestically-driven direction since mid December, which follows a sustained period of Brexit-related declines. A 20-month low versus the dollar was seen at 1.2476 on December 12. The London interbank market has been operating at skeletal staffing levels, which will remain the case through to the new year. The UK Prime Minister will likely continue to plug away in her diplomatic effort to sweeten the Brexit deal, although it's clear that there won't be any renegotiation by the EU. This suggests that the Withdrawal Agreement from the EU is headed for eventual failure in the UK Parliament. The parliamentary vote on the Brexit deal and outline for a future relationship will take place in the week of January 14, before the legislated deadline of January 21. Our best guess remains that Parliament will vote down the deal and, of all the possible scenarios at that point, that a new EU referendum will be the path of least resistance. We anticipate that the Pound with remain a sell-into-gains trade into the vote, but also see potential for the currency to rally between 5% and 10% as we expect disorderly no-deal Brexit scenario to be avoided.

    [USD, CHF]
    EUR-CHF has continued to gravitate around the 1.1300 level. The cross has remained comfortably above the two-and-a-half month low seen earlier in the month at 1.1225. The SNB remained firmly on hold at its quarterly policy meeting this month, continuing to rely on the combination of negative interest rates and the threat of intervention to limit appreciation in the currency in times of heightened uncertainty about the global outlook.

    [USD, CAD]
    USD-CAD has settled to the lower 1.3600s after last week printing a 19-month high at 1.3661. While the Fed has shifted to a more neutral policy footing, oil prices and other industrial commodity prices tumbled to fresh trend lows on global growth concerns last week. This backstop, which looks likely to sustain well into 2019, should keep USD-CAD biased towards the upside. Support comes in at 1.3565-68. The 2017 high at 1.3793 provides an upside waypoint.

    Paste link in email or IM