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By XE Market Analysis January 2, 2020 7:01 am
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    XE Market Analysis: North America - Jan 02, 2020

    The dollar has found a footing after coming under pressure over the Christmas week and earlier this week. Liquidity has picked up, though some centres in Asia have remained closed, including Tokyo. The narrow trade-weighted USD index (DXY) has lifted above 96.65, up from the six-month low seen earlier in the week at 96.36. EUR-USD has concurrently ebbed back under 1.1200 after pegging a four-month high at 1.1239 on Tuesday. The U.S. currency is also showing moderate gains against most Asian currencies, including the yen. USD-JPY has lifted to an intraday high at 108.79, up from the three-week low that was seen earlier in the week at 108.47. Stock markets have opened the new year on a strong footing, aided by the PBoC's decision, announced yesterday, to trim the reserve requirement ratio for banks. This followed President Trump saying yesterday that the U.S.-China phase-1 trade deal will be signed on January 15. The MSCI Asia-Pacific stock index rallied by 0.5%, building on the 5.6% gain that was seen in December. The MSCI's all-country world index has remained buoyant after posting a record high on December 27. Elsewhere in forex markets, the pound has started the new year on a soft footing, reversing some of the gains seen over the last week. Brexit is set to happen on January 31, at which point the UK will enter an 11-month transition phase, during which time the country will remain in the EU's single market and customs union.

    [EUR, USD]
    EUR-USD edged out a fresh four-month high at 1.1222. A pricing out of Fed tightening, after the U.S. central bank hiked rates three times earlier in the year, has been weighing on the U.S. currency, along with the thawing in U.S.-China trade relations and the resolution of Brexit, which has seen the dollar's safe-haven premium unwind. Markets are presently discounting nearly 50% odds for the Fed to cut rates by 25 bps or more by the 2020 December FOMC. 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.

    [USD, JPY]
    USD-JPY lifted to an intraday high at 108.79, up from the three-week low that was seen earlier in the week at 108.47. Stock markets have opened the new year on a strong footing, aided by the PBoC's decision, announced yesterday, to trim the reserve requirement ratio for banks. This followed President Trump saying yesterday that the U.S.-China phase-1 trade deal will be signed on January 15. The MSCI Asia-Pacific stock index rallied by 0.5%, building on the 5.6% gain that was seen in December. The MSCI's all-country world index has remained buoyant after posting a record high on December 27. 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 starts the new year trading at a discount of about 8-9% in trade-weighted terms 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 short 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. The UK's Telegraph newspaper earlier in the week cited Phil Hogan, the new EU trade commissioner, predicating that prime minister Johnson will renege on his self-imposed legal commitment to exit the Brexit transition period by the end of 2020. Hogan drew attention to Johnson's high profile pledge to "die in a ditch" rather than let Brexit be extended beyond October. We concur with this view.

    [USD, CHF]
    EUR-CHF has rebounded to the upper 1.0800s after diving to a three-month low at 1.0840 earlier in the week, which is the new 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 implied that the no-deal threat was still an option.

    [USD, CAD]
    USD-CAD has managed to find a footing after a precipitous fall on the final day of 2019 to a 15-month low at 1.2951. The low was the culmination of a 2-big-figure-plus post-Christmas dive. The gains in the Canadian dollar were concomitant with gains in the other commodity currencies, and with the MSCI all-country world index posting a record high in late December. Three-month high in oil prices was a further boost to the Canadian currency. Front-month WTI crude posted a high at $62.34 on Monday, and while off theses highs now, crude prices remain over 12% up from November lows, and are up by over 21% from the lows seen in September. Data showing drawdowns in U.S. crude reserves, along with and tensions in the Mideast, have been added factors underpinning oil prices, aside from risk-on sentiment. 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 in December has also weighed on USD-CAD. The pairing looks likely to continue to trade with a overall downside bias.

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