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By XE Market Analysis November 6, 2019 7:34 am
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    XE Market Analysis: North America - Nov 06, 2019

    The dollar and other currencies lacked direction as risk-on positioning that dominated since last Friday's U.S. employment report lost steam. Valuations of many major equity indices have been left looking rich as investors take a more circumspect view about whether the 13th round of trade talks between the U.S. and China will produce a deal, with Beijing continuing to demand that the U.S. rolls back tariffs before President Xi agrees to sign off on the "phase 1" deal. German orders data today looked strong at the headline level, but still left orders down over the quarter in Q3, and while the final Eurozone composite PMI was unexpected revised higher, the report still paints an overall picture of stagnation rather than a real improvement in economic activity. Japan's services PMI also showed the first month of contraction in the sector in over three years. This bakdrop saw USD-JPY ebb back to levels around the 109.00 area, consolidating recent gains that left a one-week high at 109.27 yesterday (which is 1 pip shy of matching last week's three-month peak). AUD-JPY, which was an outperformer in recent sessions, settled lower from the three-month highs that were seen yesterday. Other yen crosses have also settled after recent gains. EUR-USD settled above the three-week low seen yesterday at 1.1063, and Cable lodged in the upper 1.2800s after failing to sustain gains above 1.2900 in recent sessions. USD-CAD steadied in the mid 1.3100s after some choppy price action of late.

    [EUR, USD]
    EUR-USD has settled above the three-week low seen yesterday at 1.1063. The low was partly a product of dollar strength, and partly euro underperformance, with the common currency having racked up declines against a number of other currencies. EUR-GBP, for instance, clocked a two-week low, and EUR-AUD a seven-week low. A sputtering Eurozone economy has been put into relatively sharp contrast by data showing the U.S. economy to be in finer fettle than many were fearing (evidenced by the strong ISM services data and employment reports for October), while the CME's FedWatch Tool is showing market pricing to have factored in decreasing probability for a rate cut at the December FOMC, with only 5.2% odds now implied for a 25 bps cut, down 5.9% yesterday and 17.2% a week ago (before the October payrolls release). In the bigger view, and despite recent gains, we still class EUR-USD as being amid a bear trend that's been unfolding since early 2018, from levels around 1.2500. The trend has coincided with the 10-year T-note versus 10-year Bund yield differential having narrowed from 278 bps to the current 218 bps.

    [USD, JPY]
    USD-JPY has ebbed back to levels around the 109.00 area, consolidating recent gains that left a one-week high at 109.27 yesterday (which is 1 pip shy of matching last week's three-month peak). AUD-JPY, which was an outperformer in recent sessions, has settled lower from the three-month highs that were seen yesterday. Other yen crosses have also settled after recent gains. The yen has continued to be directionally driven by the ebb and flow of risk appetite in global markets. With the equity market rally of recent days -- which produced fresh record highs in three main U.S. indices on Wall Street, and a 13-month high in the Nikkei 225 -- having cooled, the Japanese currency has firmed up. This is a long standing inverse correlation (rooted in causational factors, although these are less strong than they were). A big focus remains on the U.S.-China trade front. The risk-on vibe that was coursing through global markets in the wake of last Friday's U.S. payrolls data has come off the boil, with the valuations of many major equity indices looking rich and amid a degree of circumspection creeping in with regard to whether the 13th round of trade talks between the U.S. and China will produce a deal. Assuming the "phase 1" deal comes to fruition, and with the U.S. economy enjoying what looks like a goldilocks economy -- growth slower, but holding up, inflation remaining benign -- then more upside will likely be seen in USD-JPY.

    [GBP, USD]
    Cable has lodged in the upper 1.2800s after failing to sustain gains above 1.2900. In contrast, the pound managed to eke out a two-week high versus the euro. An above-forecast October services PMI out of the UK yesterday came as something of a relief given the recent slowing in the in the UK economy. As for Cable, last week was the fourth week out of the last five where a higher high was set. From month-ago levels, the pound is the strongest performer out of the main currencies, up by nearly 5% against the dollar and by over 6% versus the yen, reflecting an unwinding in the pound's Brexit discount, with a Halloween no-deal Brexit scenario having been avoided last week. We estimate that the broad trade-weighted measure of the pound retains at about a 9% discount relative to levels prevailing ahead of the July 2016 Brexit vote, which has been pared back from lows of 15%-plus that were seen in mid August. The focus now is on the December-12 general election. The Conservative Party is out in front in opinion polling, with 38% support versus just 26% for Labour, which is in second position. This would be enough for PM Johnson's party to win a majority in the House of Commons under the UK's first past the past electoral system. There is currently a lot of debate on whether the Brexit Party decision to field candidates in nearly all constituencies will damage Labour or the Conservatives more. Small pro-EU parties are also scheming on tactics to avoid splitting the pro-EU vote.

    [USD, CHF]
    EUR-CHF has seen some choppy trading in recent sessions, but with an overall downside bias, despite the abatement in no-deal Brexit risk and the recent blast of risk-on positioning in global markets. The main driver has been broader euro underperformance. The price action, and the context of it, illustrates the much diminished safe haven characteristic the franc now has, thanks to the SNB's -0.75% deposit rate. EUR-CHF yesterday posted a near three-week low at 1.0979. After rising for four consecutive weeks, the cross is now amid its second straight down week.

    [USD, CAD]
    USD-CAD has settled in the mid 1.3100s after some choppy price action. The abatement in risk appetite has seen the Canadian dollar and other dollar bloc currencies come off the boil. USD-CAD yesterday printed a one-week low at 1.3015 before rebounding. The low was concomitant with oil prices showing a near 8% gain from month-ago levels, which is a positive for the Canadian currency, helping offset the post-payrolls spike in U.S. yields and pricing out of Fed easing expectations at the December FOMC. Taking a couple of steps back, USD-CAD is near to the midpoint of the range that's been seen over the last four-plus years.

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