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By XE Market Analysis January 8, 2020 6:10 am
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    XE Market Analysis: North America - Jan 08, 2020

    The yen surged and then sharply more than unwound gains in volatile trading during morning trading in Tokyo. The rally in the Japanese currency was part of a broader dash for safe haven assets and currencies following news that Iran had fired missiles at two U.S. bases in Iraq. The U.S. reported no casualties, and President Trump's initial tweet responses were notable for the lack of bellicosity, saying that "All is well!" and "So far, so good." Official Iranian statements were also measured, with foreign minister Zarif saying that Iran "concluded proportionate measures in self-defense under Article 51 of UN Charter" and that "we do not seek escalation or war," which further aided an unwinding in risk-off positioning, though Tehran warned the of "a painful response" to any further U.S. action. Trump said he would make a statement on Wednesday morning, which will be a major focus for markets today. More volatility in global markets seems assured given the uncertainty about the situation, although both the U.S. and Iran are showing a clear desire to avoid a full-blown war. The burst of yen buying drove USD-JPY to a three-month low at 107.65 before the pair rebounded to near net unchanged levels in the mid 108.00s. The rebound mirrored a recovery in stock markets in Asia, though most of the indices across the region, while off their lows, closed firmly in the red. S&P 500 futures recouped losses, while the main European equity indices have posted moderate declines. Oil and gold prices also spiked to fresh trend highs before retreating some. USD-CAD recouped back above 1.3000, after dropping below here as oil prices rose, though the recent lows were left unchallenged. AUD-USD printed a fresh three-week low at 0.6850 before rebounding back above 0.6880. EUR-USD has nudged to a five-day low at 1.1125 following an unexpected contraction in German manufacturing orders in November, which seemed to impart a modest downside bias on the euro.

    [EUR, USD]
    EUR-USD has nudged to a five-day low at 1.1125. An unexpected contraction in German manufacturing orders in November seemed to impart a modest downside bias on the euro. EUR-USD has so far remained above Friday's 12-day low at 1.1124. The low had been a product of dollar strength, which 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 Mideast doesn't look good, with Iran launching missiles at two U.S. airbases in Iraq, and market participants are now awaiting an address by President Trump -- whose initial tweet responses were notable for their uncharacteristic of bellicosity -- later. 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 surged and then sharply more than unwound gains in volatile trading during morning trading in Tokyo. The rally in the Japanese currency was part of a broader dash for safe haven assets and currencies following news that Iran had fired missiles at two U.S. bases in Iraq. The U.S. reported no casualties, and President Trump's initial tweet responses were notable for the lack of bellicosity, saying that "All is well!" and "So far, so good." Official Iranian statements were also measured, with foreign minister Zarif saying that Iran "concluded proportionate measures in self-defense under Article 51 of UN Charter" and that "we do not seek escalation or war," which further aided an unwinding in risk-off positioning, though Tehran warned the of "a painful response" to any further U.S. action. Trump said he would make a statement on Wednesday morning, which will be a major focus for markets today. More volatility in global markets seems assured given the uncertainty about the situation, although both the U.S. and Iran are showing a clear desire to avoid a full-blown war. The burst of yen buying drove USD-JPY to a three-month low at 107.65 before the pair rebounded to near net unchanged levels in the mid 108.00s.

    [GBP, USD]
    The pound has been trading mixed. Cable edged out a two-day low at 1.3092, while euro underperformance following weak data out of Germany saw the pound printed a a six-day high versus the common currency. UK prime minister Johnson is meeting the new president of the European Commission, Ursula von der Leyen, along with the EU's chief Brexit negotiator, Barmier, today. This is where the UK will finally start to talk about a new, post Brexit, trade deal with the EU, and comes with Johnson pledging to limit the post-Brexit transition period to the end of this year, which has been worked into the withdrawal agreement legislation. Von der Leyen argued in a recent interview with Les Echos that it will take longer than 11 months for the EU and UK to reach a new trade agreement. Phil Hogan, the new EU trade commissioner, also predicted, as did S&P Ratings and others, 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 track record for breaking promises, highlighting his pledge last year to "die in a ditch" rather than let Brexit be extended beyond October (another high profile broken promise, made during his campaign to become the Mayor of London, was his pledge to "lie down" in front the bulldozers to stop the expansion of Heathrow airport). We don't see Johnson as being serious about taking UK out of the EU without a trade deal, with the influence of the hardcore Brexit faction of his party having been diluted at the election, and given he has five years before the next election is due. But for now, expect Johnson to remain rhetorically resolute, which will cap the pound's upside potential.

    [USD, CHF]
    EUR-CHF rebounded back above 1.0800 after posting a 32-month low at 1.0788 following news of Iran's missile strike on two U.S. bases in Iraq. The franc continues to play a role as a safe haven, despite the hostile monetary policy of the SNB. The new low is the culmination of quite a sharp drop from the seven-week peak of December 13, at 1.1033.

    [USD, CAD]
    USD-CAD dropped back below 1.3000 concomitantly with oil prices rising to fresh trend highs following news of Iran's missile strike on two U.S. bases in Iraq. The pairing remained above the three-month low seen on December 31 at 1.2951. The surge in oil prices over the last several months, which has been extended by the flare-up in U.S.-Iran tensions, has been underpinning the Canadian dollar. Front-month WTI crude is up by some 24% from the lows seen last September. Gains of that magnitude, if sustained, are a big boon to Canada's terms of trade, hence the correlation between oil prices and the Canadian currency. 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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