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By XE Market Analysis January 15, 2020 6:52 am
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    XE Market Analysis: North America - Jan 15, 2020

    The dollar has been trading with an overall downward tilt, while the yen has posted gains amid a reversal in risk-on positioning on news that U.S. tariffs on Chinese goods would remain in place until the completion of the second phase of the trade agreement with China. The U.S. government was also reported to increase blocks on shipments of foreign-made goods to China’s Huawei. These developments, which have overshadowed the PBoC's extension of short- and medium-term loans today, saw stock markets retreat and safe-haven premiums richen. The MSCI Asia-Pacific index retreated from the 19-month high seen yesterday, while European stock markets went into sputtering mode. USD-JPY posted a two-day low at 109.81. AUD-JPY, widely viewed as a forex proxy on China, also ebbed to two-day lows. In Europe, Eurozone production and UK inflation data both misses expectations. EUR-USD lifted to a one-week high at 1.1154, despite the weak Eurozone numbers, extending the modest gains from yesterday's low at 1.1104. The dollar has lost some buoyancy in the wake of last Friday's below-expectations U.S. jobs report for December, which was followed by sub-forecast U.S. CPI data yesterday. The pound rotated lower on the UK CPI data, which saw the headline fall to 1.3% y/y from 1.5% y/y. Cable dropped nearly 40 pips in making a low at 1.2984. The upcoming BoE Monetary Policy Meeting, on January 30, is now live. The OIS market is discounting nearly an 60% chance for a 25 bp rate cut at the end of the month. EUR-CHF extended recent losses to a fresh 33-month low at 1.0745, driven by safe haven demand for the Swiss currency. USD-CAD remained buoyant, but below the six-day high seen yesterday at 1.3079. Oil prices found a footing after dropping sharply yesterday.

    [EUR, USD]
    EUR-USD lifted to a one-week high at 1.1154, despite Eurozone production and German GDP missing expectations today. The new low extends the modest gains from yesterday's low at 1.1104, with a sub-forecast reading in U.S. December CPI having put some pressure on the dollar. We are expecting an up-tick in inflation in the months ahead as the sharp drop in commodity prices last winter will provide a jump in y/y comparisons, though the dollar has clearly lost some buoyancy in the wake of last Friday's below-expectations U.S. jobs report for December. U.S. nonfarm payrolls missed with a rise of 145k, while wages and hours worked were soft. Markets are factoring in about a 57% chance for the Fed to cut by 25 bps or more by year end, up from about the 50% odds being given ahead of the jobs report. The ECB, meanwhile, is embedded in a wait-and-see policy stance. 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. Momentum has faded with the Fed having back out of its tightening cycle after hiking rates three times last year.

    [USD, JPY]
    The yen has firmed up amid trimming of risk-on positioning in global markets after U.S. Treasury Secretary Mnuchin said late yesterday that tariffs on Chinese goods would remain in place until the completion of the second phase of the U.S.-China trade agreement. The U.S. government was also reported to be near publication of a rule that would increase its ability to block shipments of foreign-made goods to China’s Huawei. These developments, which have overshadowed the PBoC's extension of short- and medium-term loans today, saw stock markets retreat and safe-haven premiums richen. The MSCI Asia-Pacific index retreated from the 19-month high seen yesterday, while USD-JPY posted a two-day low at 109.81. AUD-JPY, widely viewed as a forex proxy on China, also ebbed to two-day lows.

    [GBP, USD]
    The pound rotated lower on the UK CPI data, which saw the headline fall to 1.3% y/y, contrary to the median forecast for an unchanged 1.5% y/y outcome. The core CPI figure also fell, to 1.4% y/y from 1.7%, missing the median forecast for 1.6% y/y. The data adds the a growing list of bearish leads for the pound, following weak production and monthly GDP data, and dovish-leaning remarks from BoE Governor Carney and MPC member Vlieghe. Cable dropped nearly 40 pips in making a low at 1.2984. Sterling has since steadied a little above here. The pound saw a similar magnitude of decline against the euro and other currencies, though has remain above the trend lows seen yesterday. We retain a bearish view of the UK currency amid concerns about the durability of any post-election economic bounce, with Brexit issues likely to remain a concern. There is the risk of no-deal Brexit at the end of 2020, a possible, if not likely, deterioration in the UK's terms of trade for some years once the country leaves the transition period, and there are implementation issues with regard to new systems at the Northern Ireland. The upcoming BoE Monetary Policy Meeting, on January 30, is now live. The OIS market is discounting nearly an 60% chance for a 25 bp rate cut at the end of the month, up from about 50-50 odds before the inflation data. A rate cut is now fully factored-in by the end of May.

    [USD, CHF]
    EUR-CHF extended recent losses to a fresh 33-month low at 1.0745. News that the U.S. will retain tariffs on Chinese goods imports until a second phase of a trade deal with China has been completed saw risk aversion kick up in global markets, which in turn boosted the Swiss currency. The new low in the EUR-CHF cross is the culmination of quite a sharp drop from the seven-week peak of December 13, at 1.1033.

    [USD, CAD]
    USD-CAD has settled below the six-day high seen yesterday at 1.3079. We anticipate the pairing to retain an upward bias for now, with risk appetite having abated in global markets following news that the U.S. will retain tariffs on Chinese goods imports until a second phase of a trade deal with China is completed. This will likely continue to weigh on oil prides after front-month WTI futures hit a six-week low at $57.72.

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