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By XE Market Analysis January 3, 2020 7:02 am
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    XE Market Analysis: North America - Jan 03, 2020

    The dollar and yen rallied on the back of safe-haven demand following U.S. air strikes that killed the head of Iran's elite Revolutionary Guard's overseas unit. The news also saw sovereign bonds rise, gold prices rally by over 1.5%, and oil prices by over 3%, while stock markets, richly valued after recent gains (Apple shares traded above $300 for the first time yesterday, for instance), declined. Out of the main currencies, AUD-JPY has, not surprisingly, been the biggest mover, with the cross showing nearly a 1.5% decline. AUD-JPY, which had rallied strongly amid the recent risk-on phase in global markets, dove to a two-week low at 74.85. Despite the dollar gaining against other currencies, yen outperformance drove USD-JPY to a two-month low, at 107.71, while AUD-JPY fell to a one-week low at 0.6952. The New Zealand dollar, and most developing-world currencies, also declined, while the Canadian dollar held up relatively well on the back of the rise in oil prices. EUR-USD and EUR-JPY fell to respective one- and three-week low, at 1.1125 and 120.17. Cable and GBP-JPY hit four- and eleven-day lows respectively. In stock markets, S&P 500 futures down by over 1.3% after the cash version of the index hit fresh record highs on Wall Street yesterday. The MSCI Asia-Pacific index turned negative after opening strongly, correcting from 18-month highs, while the pan-Europe's Stoxx 600 dove 1%.

    [EUR, USD]
    EUR-USD and EUR-JPY fell to respective one- and three-week low, at 1.1125 and 120.17, as a risk-off theme coursed through global markets after a U.S. strike took out a senior officer in the Iranian military. EUR-CHF also dropped, with the cross posting a four-month low at 1.0824. The euro has fared better against sterling and the commodity bloc currencies, particularly the underperforming Australian and Zealand units. As for the dollar, safe haven demand has dominated, with gains coming despite markets discounting about 60% odds for the Fed to cut rates by 25 bps or more by the 2020 December FOMC (up from 50% a day ago). 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]
    The yen has rallied amid a dash for safe havens following U.S. air strikes that killed the head of Iran's elite Revolutionary Guard's overseas unit. The news also saw gold prices rally by over 1%, and oil prices by over 3%, while stock markets, richly valued after recent gains (Apple shares traded above $300 for the first time yesterday, for instance), declined. Out of the main currencies, AUD-JPY has, not surprisingly, been the biggest mover, with the cross showing over a 1% decline. AUD-JPY, which has rallied strongly amid the recent risk-on phase in global markets, dove to a two-week low at 74.85. The cross is down by over 2% from the highs seen on Monday. USD-JPY plunged to a two-month low, at 107.91, while AUD-JPY fell to a one-week low at 0.6952.

    [GBP, USD]
    Cable and GBP-JPY hit four- and eleven-day lows respectively, amid safe-haven positioning on news of the U.S. strike that took out a senior officer in the Iranian military. The pound has started 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 dropped to a four-month low at 1.0824, weighed on by safe-haven positioning on news of the U.S. military strike that took out a senior Iranian officer. The new low 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 implied that the no-deal threat was still an option.

    [USD, CAD]
    USD-CAD has found a tentative 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. Since then, stock markets, and the Australian and New Zealand dollars, have turned sharply lower on news of the U.S. military strike that took out a senior Iranian officer, though a consequential 3%-plus spike in oil prices has kept the Canadian dollar relatively well bid. Front-month WTI crude posted a nine-month high at $63.86.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, with markets presently discounting about 60% odds for the Fed to cut rates by 25 bps or more by the end of 2020. The pairing looks likely to continue to trade with a overall downside bias.

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