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By XE Market Analysis January 16, 2020 7:23 am
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    XE Market Analysis: North America - Jan 16, 2020

    Both the dollar and yen traded softer versus most other currencies, particularly against the Swiss franc. Equity markets have turned somewhat flat after the MSCI all-country world index edged out a fresh record following the signing of the phase-1 trade deal between the U.S. and China. While concerns remain about the deal itself, and future trading relations, there is conjecture that President Trump will go relatively easy on China for now (at least in actions if not rhetoric) as he turns his focus on the November presidential election. Against this backdrop the dollar, which has lost buoyancy over the last week following the misses in U.S. jobs and CPI data reports, printed three-day lows against the pound and Canadian dollar today and a 16-month low versus the Swiss franc while remaining heavy versus the euro, with EUR-USD underpinned, though just off the eight-day high seen yesterday at 1.1163. USD-JPY, in contrast, printed a two-day high at 110.06 on the back of yen underperformance, returning focus on the eight-month high seen earlier in the week at 110.21. Cable, meanwhile, edged out a three-day peak, at 1.3065, and USD-CAD printed a three-day low at 1.3032. EUR-CHF extended recent losses to a fresh 33-month low at 1.0732. This is the sixth week out of the last seven that the cross has declined, with losses accelerating this week. The reason for the divergence in the two main currency safe-haven currencies, the yen and the franc, is the U.S. Treasury having added Switzerland to its list of currency manipulators. This seems a bit rich given the franc is a demonstrably chronically overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index). The U.S. argues that Switzerland needs a more expansive fiscal policy. The CHF-JPY cross is now trading at 13-month highs after rallying by almost 5% from levels seen in late November.

    [EUR, USD]
    EUR-USD has remained underpinned, though below the eight-day high seen yesterday at 1.1163. The dollar is consolidating after edging lower in recent sessions following the misses in December jobs and CPI data out of the U.S. 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. The ECB, meanwhile, remains entrench in a policy wait-and-see mode.

    [USD, JPY]
    USD-JPY has printed a two-day high at 110.06. This returns focus on the eight-month high seen earlier in the week at 110.21. The pair has been trending higher since last week's low at 107.65, which was seen in the initial wake of the Iranian missile strike on U.S. military bases in Iraq, which capped out at the eight-month seen on Tuesday, at 110.21. The de-escalation in Mideast tensions, coupled with the signing-off on the phase-1 trade deal between the U.S. and China have been maintain risk appetite in global markets, which has seen the yen underperform most other currencies. Equity markets have turned somewhat flat after the MSCI all-country world index edged out a fresh record following the signing of the phase-1 trade deal between the U.S. and China. It took nearly 20 months to arrive at this point, though the deal doesn't fully eliminate tariffs, while the $200 bln worth of U.S. products for China to buy is a target, and not set in stone. The enforcement mechanism worked into the deal also implies that there will be a risk snapback of U.S. tariffs or China's commitment. The two sides will also be working on a phase-2 deal, which deals with the thorny issues of security and technology transfers. There is, however, conjecture that President Trump will for now go easy on China while he focuses on the November presidential election, and this seems to be maintaining investor spirits for now. The BoJ's next policy meeting is up next week, where a no-change decision is widely anticipated, though the central bank is also expected to lift growth estimates as a consequence of the U.S.-China trade deal and de-escalation in Mideast tensions.

    [GBP, USD]
    The pound has found a better footing over the last day, having recouped losses seen in the wake of sub-forecast CPI data out of the UK earlier in the week. Cable today edged out a three-day peak, at 1.3065. UK CPI fell to a rate of 1.3% y/y in December, contrary to the median forecast for an unchanged 1.5% y/y outcome, though the outcome is broadly in line with BoE projections. We still retain an overall 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, there is a real possibility of a 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 post-Brexit systems at the Northern Irish border. The upcoming BoE Monetary Policy Meeting, on January 30, is now a live meeting. 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. The BoE-sensitive 2-year Gilt yield had dropped by nearly 20 bp over the last week. The next data of note out of the UK will be December retail sales, out tomorrow. We expect sales to rebound 0.5% (median 07%) in following the 0.6% contraction in November.

    [USD, CHF]
    EUR-CHF extended recent losses to a fresh 33-month low at 1.0732. This is the sixth week out of the last seven that the cross has declined, with losses accelerating this week. The reason for the divergence in the two main currency safe-haven currencies, the yen and the franc, is the U.S. Treasury having added Switzerland to its list of currency manipulators this week. This seems a bit rich given the franc is a demonstrably chronically overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index). The U.S. argues that Switzerland needs a more expansive fiscal policy. The CHF-JPY cross is now trading at 13-month highs after rallying by almost 5% from levels seen in late November.

    [USD, CAD]
    USD-CAD printed a three-day low at 1.3032. The low reflected broader dollar softness, with the U.S. currency having lost some buoyancy following misses in U.S. jobs and CPI data over the last week. 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 some 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 prices. Front-month WTI futures yesterday hit a six-week low at $57.38.

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