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By XE Market Analysis January 24, 2020 7:36 am
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    XE Market Analysis: North America - Jan 24, 2020

    The yen has steadied at softer levels. There was a general lack of direction in Asian markets while European stock markets and U.S. index futures posted gains. China, Taiwan and South Korea markets were closed for Lunar New Year holidays, with the former two now closed through to the end of next week. Markets are waiting to see how well China and other nations will contain the coronavirus outbreak. Some 25 million people are now effectively in quarantine in China, and travel bans have been issued, and Chinese cities, including Beijing, have cancelled New Year celebrations, while the World Health Organization labelled the outbreak an emergency (amid criticism that it was too slow in doing so). Concerns remain, however, that the sweet spot for prevention and control has been missed, with reported cases cropping up across Asia and in the U.S. Time will tell. USD-JPY lifted above 109.50, modestly up on the two-week low seen yesterday at 109.26. Elsewhere, EUR-USD etched out a fresh seven-week low at 1.1028. The move partly reflected a phase of broader euro weakness following the release of the flash Eurozone January PMI data showing a miss in the composite headline, at 50.9, despite a firm German reading. EUR-GBP clipped a near-six-week low following a much better than expected UK PMI data, while other euro crosses have been heavy, although remaining above recent lows. The dollar itself has also been trading with modest firmness. Sterling rallied and then turned lower despite unambiguously solid PMI survey data. Cable printed a post-data high at 1.1375, a seventeen-day high, in the immediate wake of the data release only to subsequently drop to a two-day low at 1.3085. EUR-GBP concurrently posted a near-six-week low at 0.8388 before lifting back to near net unchanged levels around 0.8420. USD-CAD has consolidated in the lower 1.3100s following a correction from the one-month high seen yesterday at 1.3171. Oil prices have found a footing after tumbling by nearly 8% this week.

    [EUR, USD]
    EUR-USD has remained a directionally boring pair, holding today in a narrow range below 1.1100. The range on the year-to-date has been 1.1070 - 1.1124, with the low being printed yesterday. The ECB's governing board meets today, and is widely expected to a non-event for markets, with both policy and guidance seen unchanged. 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 steadied at softer levels. There was a general lack of direction in Asian markets while European stock markets and U.S. index futures posted gains . China, Taiwan and South Korea markets were closed for Lunar New Year holidays, with the former two now closed through to the end of next week. Markets are waiting to see how well China and other nations will contain the coronavirus outbreak. Some 25 million people are now effectively in quarantine in China, and travel bans have been issued, and Chinese cities, including Beijing, have cancelled New Year celebrations, while the World Health Organization labelled the outbreak an emergency (amid criticism that it was too slow in doing so). Concerns remain, however, that the sweet spot for prevention and control has been missed, with reported cases cropping up across Asia and in the U.S. Time will tell. USD-JPY lifted above 109.50, modestly up on the two-week low seen yesterday at 109.26.

    [GBP, USD]
    Sterling rallied and then turned lower despite unambiguously solid PMI survey data. Cable printed a post-data high at 1.1375, a seventeen-day high, in the immediate wake of the data release only to subsequently drop to a two-day low at 1.3085. EUR-GBP concurrently posted a near-six-week low at 0.8388 before lifting back to near net unchanged levels around 0.8420. The UK's flash January composite PMI smashed expectations in rising to 52.4, a 16-month high and a solid rebound from December's 49.3 reading. The median forecast had been for a much more modest lift to 50.5. This is the first time the composite headline had been above 50.0 since last August, driven by the sharpest increase in new work since September 2018, reflecting a release in pent-up demand following the election result in December, which cleared the fog of Brexit and political uncertainty. Employment rose for a second month, while business optimism also lifted to its highest level since June 2015. There doesn't appears to ba a clear-cut reason why the pound more than gave back initial gains in the wake of the data. One candidate theory in market narratives is that it reflects a general non-committal state of markets given prevailing uncertainty about the coronavirus outbreak in Asia. Other conjecture includes the view that the post-election bounce in the UK economy will prove to be short lived, especially with the government having set what looks to be an impossible time-frame of just 11 months to strike a new trade deal with the EU. Positioning in OIS markets now implies a 47% probability for the BoE trimming the repo rate by 25 bp at the January-30th MPC meeting, so markets are still anticipating easier monetary policy, albeit to a lesser extent than recently.

    [USD, CHF]
    EUR-CHF found a toehold out posting a fresh 33-month low at 1.0702 yesterday. The low reflected a richening in safe-haven premiums in global markets, which underpinned the Swiss currency. Concerns about contagion (and mutation) of the coronavirus have been affecting market sentiment across the world. The franc had already rallied strongly last week following the surprising 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), though the Trump administration argues that Switzerland needs a more expansive fiscal policy.

    [USD, CAD]
    USD-CAD has consolidated in the lower 1.3100s following a correction from the one-month high seen yesterday at 1.3171. Oil prices have found a footing after tumbling by nearly 8% this week. Losses were driven by concerns about the demand impact from the virus in Asia, along with the IEA forecasting a crude surplus in the first half of the year. The BoC left policy on hold at its policy review this week, as had been widely anticipated. The statement said: "Data for Canada indicate that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October", noting that, "job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft." We anticipated USD-CAD to trade with an upside bias going forward.

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