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By XE Market Analysis January 6, 2020 7:07 am
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    XE Market Analysis: North America - Jan 06, 2020

    The yen posted fresh highs as stock markets continued to fall in Asia with market participants fretting about upscaling risks for a deepening conflict between the U.S. and Iran. President Trump threatened "major retaliation" if Iran responded to the U.S. assassination of one of Iran's top generals, while Tehran vowed to expel the U.S. from the region. Gold prices rose a further 1.5%, and are up over 3.5% from levels prevailing before news of the U.S. strike broke on Friday. USD-JPY printed a near three-month low, at 107.77, as the yen's safe-haven premium rose. AUD-JPY, a forex market barometer of risk appetite in global markets, pegged a 25-day, though not all yen crosses, including EUR-JPY, surpassed their Friday lows. Tokyo markets returned from Japan's extended new-year break, and the Nikkei 225 played catch by closing with a near 2% loss. The dollar took a turn lower versus the main European currencies, backtracking most of the safe-haven gains seen on Friday. EUR-USD rose by over 40 pips to levels back above 1.1200. Cable lifted by a similar magnitude, while USD-CHF dropped by a similar extent. An upward revision to the final December Eurozone services PMI, to 52.8 from 52.4, and an unexpected upward revision in job creation in the UK's final December services PMI, elicited buying in EUR-USD and Cable. Oil prices, not surprisingly, posted fresh highs, with front-month WTI futures posting a nine-month high at $64.72. Middle Eastern OPEC members account for an estimated 64.5% of proven global crude reserves. The rise in oil prices saw USD-CAD drop back under 1.3000, reversing most of the rebound seen on Friday.

    [EUR, USD]
    EUR-USD has seen a 40-pip-plus rally to levels back above 1.1200, reversing a good portion of the safe-haven decline the dollar drove on Friday. Cable has risen by a similar magnitude, while USD-CHF has dropped by a similar extent. An upward revision to the final December Eurozone services PMI, to 52.8 from 52.4, and an unexpected upward revision in job creation in the UK's final December services PMI, elicited buying in EUR-USD and Cable. The gains put in some distance from the 10-day low EUR-USD saw on Friday, at 1.1124. The low was a product of dollar strength, which had picked up safe-haven demand market participants fretted about upscaling risks for a deepening conflict between the U.S. and Iran. The situation in the Mid-east doesn't look good. President Trump threatened "major retaliation" if Iran responded to the U.S. assassination of one of Iran's top generals, while Tehran vowed to expel the U.S. from the region. 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 been competing with the Fed policy outlook, with markets discounting about 60% 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]
    The yen posted fresh highs as stock markets continued to fall with market participants fretting about upscaling risks for a deepening conflict between the U.S. and Iran. President Trump threatened "major retaliation" if Iran responded to the U.S. assassination of one of Iran's top generals, while Tehran vowed to expel the U.S. from the region. Gold prices rose a further 1.5%, and are up over 3.5% from levels prevailing before news of the U.S. strike broke on Friday. USD-JPY printed a near three-month low, at 107.77, as the yen's safe-haven premium rose. AUD-JPY, a forex market barometer of risk appetite in global markets, pegged a 25-day, though not all yen crosses, including EUR-JPY, surpassed their Friday lows. Tokyo markets returned from Japan's extended new-year break, and the Nikkei 225 played catch by closing 1.9% for the worse.

    [GBP, USD]
    Sterling has rotated higher during the London morning session, partly driven by stop-buying in Cable amid a broad downturn in the dollar. A revision higher in the final December Eurozone services PMI sparked buying in EUR-USD. The pound concurrently rose versus the euro, yen and other currencies, reversing some of the recent losses the UK currency has seen. Gains were seen both before and after the release of the final UK services PMI report for December, which showed an unexpected upward revision in job creation in the dominant sector. The pound, despite rallying strongly during the last part of last year, is starting 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 happen at the end of January, at which point 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. The reality is that it will take years to replicate the trading terms the UK has enjoyed as part of the EU's single market, along with the 40 trade deals the EU has with some 70 other economies and trading areas. Many observers, including ourselves, expect prime minister Johnson to renege on his self-imposed legal commitment to exit the Brexit transition period by the end of 2020. Johnson has plenty of form in U-turning from high profile pledges, most recently his promise to "die in a ditch" rather than let Brexit be extended beyond October (his promise while Mayor of London to "lie down" in front the bulldozers to stop the expansion of Heathrow airport was another). We anticipate that the Brexit rubber hitting the road will curtail the pound's upside potential in 2020.

    [USD, CHF]
    EUR-CHF has found a toehold after dropping on Friday 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 dropped back under 1.3000, reversing most of the rebound seen on Friday as oil prices printed fresh trend highs as market participants fret about upscaling risks for a deepening conflict between the U.S. and Iran. President Trump threatened "major retaliation" if Iran responded to the U.S. assassination of one of Iran's top generals, while Tehran vowed to expel the U.S. from the region. Front-month WTI futures were showing a 1.7% gain heading into the London session, at $64.14, earlier posting a nine-month high at $64.72. Middle Eastern OPEC members account for an estimated 64.5% of proven global crude reserves. The Fed's removing a forecast for a 25 bps hike in 2020 at its FOMC policy meeting in December has also been weighing 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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