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By XE Market Analysis January 22, 2020 7:33 am
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    XE Market Analysis: North America - Jan 22, 2020

    The dollar has traded mostly firmer amid a fickle sentiment backdrop in global markets, which turning more cautious in Europe after a bullish session across Asian stock markets, which had been fostered by the swift and transparent response of China to the coronavirus outbreak. Some market commentaries have been highlighting that this contrasts to Beijing's initial cover-up of the SARS outbreak back in 2003. The yen and Swiss franc turn remained net lower after their safe-haven premiums unwound some. USD-JPY recouped some three quarters of yesterday's decline in posting an intraday high at 110.10, swinging the eight-month peak seen last Friday at 110-28 back into scope. USD-CHF and EUR-CHF printed respective seven- and eight-day highs, at 0.9729 and 1.0788. President Trump's trade-warring focus on Europe soured the mood somewhat, and the stock indices in Europe came off their highs. EUR-USD edged out a one-month low at 1.1075 as the narrow trade-weighted USD index (DXY) posted a two-day high at 97.68, which is just 5 pips shy of the four-week peak seen on Monday. Elsewhere, the pound rose to respective 5-day and two-week highs against the dollar and euro following data showing that a post-UK-election rebound in economic activity is afoot. The January CBI's industrial trends survey showed business optimism to have leapt to a reading of +23 from -44, although headline activity remained low. This followed yesterday's above-forecast UK labour report. The data have seen UK markets de-scale expectations for the BoE to cut rates as soon as next week's policy meeting. USD-CAD rallied to a two-week high at 1.3092 on the back of a firmer U.S. currency and softer oil prices. The BoC meets on policy today. We expect the central bank to hold rates steady at 1.75%.

    [EUR, USD]
    EUR-USD edged out a one-month low at 1.1075. This came with the narrow trade-weighted USD index (DXY) lifting moderately and posting a two-day high at 97.68, which is just 5 pips shy of the four-week peak seen on Monday. Bigger picture, the pair 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 backed out of its tightening cycle after hiking rates three times last year. The central bank has since been engaged in capping the repo rate, which has seen its balance swell by some 11% since last September. The ECB, meanwhile, remains entrenched in a policy wait-and-see mode.

    [USD, JPY]
    The yen has traded lower as safe-haven premiums unwound in Asian markets today, brought about by the swift and transparent response of China to the coronavirus outbreak. Some market commentaries have been highlighting this contrasts to Beijing's initial cover-up of the SARS outbreak back in 2003. This underpinned stock markets in Asia. Amid this backdrop, USD-JPY recouped some three quarters of yesterday's decline in posting an intraday high at 110.10, swinging the eight-month peak seen last Friday at 110-28 back into scope.

    [GBP, USD]
    The pound rose to respective 5-day and two-week highs against the dollar and euro following data showing that a post-UK-election rebound in economic activity is afoot. The January CBI's industrial trends survey showed business optimism to have leapt to a reading of +23 from -44, although headline activity remained low. This followed yesterday's above-forecast UK labour report. The data have seen UK markets de-scale expectations for the BoE to cut rates as soon as next week's policy meeting. We have been arguing that the BoE is likely to refrain from cutting rates at this juncture, and instead opt to ratchet up dovish guidance. Policymakers will still be looking to see the full impact that the lifting of Brexit and political fog has has since the election in mid December, especially with the global economy looking to be holding up, and with the government set to pursue a more expansive fiscal policy. Next UK data of note will be the flash January PMI survey, on Friday, after the BoE decision, which we expect to show a rise in the composite headline, to 50.5, from December's 49.5 reading. This matches the consensus forecast. Note that the latest week CFTC data shows the longest net long positioning in sterling futures by speculative accounts since April 2018, which seems to reflect expectations for there being a post-election lift in economic activity in the UK.

    [USD, CHF]
    USD-CHF and EUR-CHF printed respective seven- and eight-day highs, at 1.0760 and 0.9704, reflecting a broader unwinding of safe haven premiums in global markets, with Chinese and Asian stock markets rebounding as Chinese Beijing and regional governments act quickly to stem contagion of the coronavirus outbreak. The franc rallied strongly last week following the logic-defying decision by the U.S. to add Switzerland to its list of currency manipulators earlier in the week. The U.S. move 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.

    [USD, CAD]
    USD-CAD rallied to a two-week high at 1.3092 on the back of a firmer U.S. currency and softer oil prices. Regarding crude, front-month WTI futures dove over 3% from Monday's high in printing a six-day low yesterday at $57.72. Crude prices have since remained heavy, although above this low. Concerns about the oil supply outage in Libya having abated. The BoC meets on policy today. We expect the central bank to hold rates steady at 1.75%. The Monetary Policy Report will also be published, which will detail the bank's growth and inflation outlook. Our base case remains for no change in rates this year amid a steady outlook from the BoC.

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