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By XE Market Analysis November 8, 2019 7:37 am
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    XE Market Analysis: North America - Nov 08, 2019

    The dollar nudged higher during the late London morning session, while the yen also posted moderate gains against most currencies against a backdrop of sputtering stock markets in Europe. The narrow trade-weighted USD index (DXY) lifted to a 23-day high of 98.32 while EUR-USD concomitantly ebbed to a 23-day low, at 1.1026. The biggest mover was AUD-USD, which shed 0.5% in printing a nine-day low at 0.6861. AUD-JPY also came under pressure, with the cross perhaps looking ripe for a correction after rallying by over 7% from late-August lows. The RBA's Statement on Monetary Policy reaffirmed that it is prepared to ease policy again if needed. USD-CAD posted an eight-day peak at 1.3205 before dropping back as markets pared positions into the release of Canada's October employment report, which most expect to be quite strong. USD-JPY saw moderate gains, but remained below the five-month high seen yesterday at 109.48. Data today showed Chinese exports declining, although by less than feared. Sterling traded mixed, losing ground to the dollar but holding firm against other currencies. The UK currency is completing what has been a directionally inactive week, consolidating after recent Brexit-related outperformance. On the U.S.-China trade front, a degree of uncertainty has creeped back in with regard to the prospects of a "phase 1" trade deal being struck. There are reports of fierce internal opposition among members of the Trump administration, while there is conjecture that President Trump will be emboldened by recent relatively strong U.S. data releases and the record highs on Wall Street and will be apt to take a tough stance against Beijing.

    [EUR, USD]
    EUR-USD dipped to an intraday low at 1.1038 before recouping to narrow range trading near 1.1050, having left the 23-day low seen yesterday at 1.1036 unchallenged. The pairing is showing a net loss of just over 1% from week-ago levels, coming after the surprisingly strong U.S. jobs report of last Friday, and followed-up this week by decent non-manufacturing ISM and initial jobless claims data. 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, 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% down from 22% last week (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 216 bps.

    [USD, JPY]
    USD-JPY, after scaling to a five-month high at 109.48, has settled around 109.20-30. AUD-JPY, which has been an outperformer amid the recent risk-on phase (showing a 7.4% gain at prevailing levels from late-August lows), has also settled lower after printing a three-month peak yesterday. "Abenomics" has been dusted down this week, with Japanese PM Abe today pledging a renewed push of fiscal stimulus, while BoJ Governor Kuroda earlier in the week reaffirmed the central bank's commitment to monetary easing to achieve its 2% inflation target, though he admitted "it's taking time." Regarding Japan's disinflation quagmire, while we're here, 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. The biggest directional driver of the yen is likely to remain the ebb and flow of risk appetite in global markets (there is causation behind this correlation), and so developments on the U.S.-Chine trade front will be front and centre. 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 been directionally inactive this week, consolidating after recent pronounced outperformance. From month-ago levels, Her Majesty's currency is showing a rise of over 5% against the dollar and of more than a 6.5% gain 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 left monetary policy settings unchanged at the conclusion of its November policy meeting yesterday. The two dissenters favouring a 25 bps rate cut wasn't, or shouldn't have been, much of a surprise, nor was the modest trimming in GDP and CPI projections. The MPC minutes also showed some positivity, noting that some of the uncertainty facing UK businesses and households has been removed by recent Brexit developments, while noting that UK fiscal policy is set to become easier in 2020 (as being pledged by the main parties going into the December-12 general election), and that it expects there to be a modest improvement in global growth next year, although stressing that risks remain to the downside. Governor Carney during his press conference went through the risks on the global front, but concluded by saying that "on balance we think the economy is stabilizing." Overall, much of the BoE's messaging was pretty predictable, and was not a bearish inflection point for the pound. Focus now shifts back to the upcoming election. As things stand, PM Johnson's Conservative Party is retaining a commanding lead in opinion polling that suggests they could win and be returned to government with a majority. That in turn implies Brexit being implemented in January.

    [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.

    [USD, CAD]
    USD-CAD has remained buoyant after posting a nine-day high yesterday at 1.3197. The high has come with the U.S. 10-year over Canadian 10-year yield spread having been trending wider, overall, over the last three weeks, rising from about 19 bp to 29 bp, which has offset a moderate rise in oil prices over this period (oil prices have been trending sideways, within about a $13 range, over the last five months). 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, and there presently doesn't look to be much potential for this pattern to break. The focus today falls on Canada's October employment report. We expect a 20k gain in jobs after the 53.7k gain seen in September. The unemployment rate is seen steady at 5.5%. Canada's labour market has defied fears of a slowing, posting solid gains in August and September after mild declines in June and July. Canadian housing starts, also up today, has us anticipating an improvement to 225.0k in October from 221.2k in September, as the housing sector continues to benefit from a low rate backdrop.

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