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By XE Market Analysis November 7, 2019 7:06 am
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    XE Market Analysis: North America - Nov 07, 2019

    A burst of risk-on positioning sent global stocks higher and saw the both the dollar and yen turn lower after seeing fresh highs against the other main currencies during pre-European trading in Asia. China's commerce ministry flicked the risk appetite switch back to "on" by stating that the U.S and China have agreed in principle "cancel additional tariffs in different phases." USD-JPY bounced from a two-day low at 108.64 to a high of 109.19. AUD-JPY and other yen crosses saw similar price actions. EUR-USD rallied back to the 1.1080-90 area after making a three-week low at 1.1055. EUR-JPY also jumped from a three-week low, at 120.14, to levels above 120.60. In data, German industrial production missed expectations at -0.6% m/m in September, reaffirming the recessionary picture in the sector and one of an overall sputtering Eurozone economy (we remain bearish of EUR-USD). In Japan, BoJ Governor Kuroda said that the central bank will remain committed to monetary easing to achieve its 2% inflation target, though he admitted "it's taking time" (there is a theory that QE, or QQE with yield curve control in Japan's case, is backfiring in the sense that it fosters excess capacity, thereby generating deflationary forces). Elsewhere, the pound remained in a net directionless mode ahead of the upcoming BoE policy decision, where no change is widely expected, though there might be one or two dovish dissenters in the ranks of the nine member policy committee. USD-CAD edged out an eight-day high at 1.3197 before dropping back to the mid 1.3100s.

    [EUR, USD]
    EUR-USD rallied back to the 1.1080-90 area after making a three-week low at 1.1055. EUR-JPY also jumped from a three-week low, at 120.14, to levels above 120.60. The moves reflected bouts of dollar and yen weakness, prompted by China saying that it has reached and agreement in principle with the U.S. on tariff reductions, rather than euro outperformance. Overall, we remain bearish of EUR-USD. 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 8% down from 22% a week ago (before the October payrolls release). EUR-USD has been 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 217 bps.

    [USD, JPY]
    The yen dropped quite sharply after seeing fresh highs against the other main currencies. USD-JPY bounced from a two-day low at 108.64 to a high of 109.19. EUR-JPY, AUD-JPY and other yen crosses saw similar price actions which came amid a sudden burst of risk-on positioning, which happened just as the London interbank market was kicking into gear, and saw most of the main equity indices in Asia jump from losses to net gains. The catalyst was China's commerce ministry stating that the U.S and China have agreed in principle "cancel additional tariffs in different phases." This came after BoJ Governor Kuroda said that the central bank will remain committed to monetary easing to achieve its 2% inflation target, though admitting "it's taking time" (there is a theory that QE, or QQE with yield curve control in Japan's case, is backfiring in the sense that it fosters excess capacity, thereby generating deflationary forces). Assuming the "phase 1" deal comes to fruition, and with the U.S. economy enjoying what looks like a goldilocks economy -- growth slower, but still holding up, and inflation remaining benign -- then more upside will likely be seen in USD-JPY.

    [GBP, USD]
    The pound has gone directionless after a recent phase of pronounced outperformance. From month-ago levels, Her Majesty's currency is showing a rise of over 5% against the dollar and of more than 7% 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 BoE's Monetary Policy Committee announces the outcome of this week's meeting later (noon in London, 07:00 ET). The strong consensus is for no change, which would leave the repo rate at 0.75% and QE totals unchanged, though there is a chance that we'll see dovish dissent amid the ranks of the nine-member committee, with members Saunders and Vlieghe having recently voiced concern about the damage that Brexit uncertainty is doing. Most members look be preferring to remain on hold into the December general election. Both of the principal parties in the UK, the Conservatives and Labour, are pledging fiscal spending if they are elected, which won't have gone unnoticed at the MPC. The BoE will also release its quarterly Inflation Report, which isn't expected to show much change to existing projections. London markets are pricing in bout 45% odds for a 25 bps rate cut by next May, and an 85% chance for such a move by the end of 2020. As for the upcoming general election, PM Johnson't Conservative Party is holding a commanding lead in opinion polls, meaning that a January Breixt is looking likely.

    [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.

    [USD, CAD]
    USD-CAD edged out an eight-day high at 1.3197 before dropping back to the mid 1.3100s. A turn higher in global stock markets gave the dollar bloc currencies a lift while weighing on the U.S. dollar and yen. USD-CAD earlier in the week printed a one-week low at 1.3015 before rebounding. 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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