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By XE Market Analysis November 18, 2019 7:21 am
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    XE Market Analysis: North America - Nov 18, 2019

    The pound has rallied quite sharply, while the dollar and yen have underperformed among the other main currencies in early week trading so far. Cable printed a four-week high at 1.2985, which has drawn in the six-month high seen in last October at 1.3912. EUR-GBP has concurrently extended further into six-month low terrain, making low so far at 0.8521. Boosting the pound today were weekend polls showing PM Johnson's Conservative Party having extended its lead in opinion polls. This strengthens the odds for the party to win the December-12 election and be returned to Parliament with a working majority, which in turn suggests that the Brexit deal on the table will be implemented in January, when the UK will then enter a transition phase through to the end of 2020. This would avoid there being another referendum, and brings a slight degree of certainty to the UK outlook. EUR-USD, meanwhile, printed an 11-day high at 1.1067, with the euro naturally sharing some of the benefit of the Brexit news. EUR-JPY and EUR-CHF concurrently posted six-day highs. The yen softened against most other currencies amid a risk-on backdrop. USD-JPY printed a five-day high at 109.07, with the Japanese currency beating the dollar in the biggest loser stakes. Most Asian markets lifted, and S&P 500 futures are higher, though the main European stock indices were near net unchanged as of the early afternoon.The PBoC surprised by trimming seven-day reverse repurchase agreements by 5 bp to 2.50%, while state median in China said over the weekend that it had "constructive talks" with the U.S. on trade in a high-level phone call.

    [EUR, USD]
    EUR-USD has printed an 11-day high at 1.1067, rising on the coattails of Cable, which pas pressed to a four-week high, at 1.2985 following polling showing PM Johnson has extended his lead in opinion polls ahead of the December-21 general election in the UK. EUR-JPY and EUR-CHF have concurrently posted six-day highs, though pound outperformance has driven EUR-GBP to a new five-month low. EUR-USD would need to reach the finish line on Friday above 1.1050-51 to rack up a second consecutive week of advance. The pairing has been chopping around 1.050 since early August, ranging from 1.0879 to 1.1179 over this period. The low marked a two-and-a-half year trough, the culmination of a bear trend that's been unfolding since early 2018, from levels around 1.2500. Momentum of this trend has been waning with the Fed having cut interest rates three times since late July, though markets have now priced out further Fed easing. The CME's FedWatch tool now shows a 2.2% odds are being factored for a 25 bp hike at the December FOMC, having shifted from odds of over 20% for a rate hike at this meeting that were being factored before the release of the unexpectedly robust October employment report (released on November 1). The Fed's measure of the dollar's broad trade-weighted dollar is at near three-year highs. A continuation of dollar firmness would likely keep EUR-USD's overall bias to the downside. Both incoming U.S. data and the Fed minutes on Wednesday are likely to reaffirm the Fed on hold view.

    [USD, JPY]
    The yen has remained on a softening tack against most other currencies amid a risk-on backdrop. The three main U.S. equity indices all scaled new record highs on Friday, and S&P 500 futures are showing a 0.2% gain in overnight trading. Most Asian markets have lifted. The PBoC surprised by trimming seven-day reverse repurchase agreements by 5 bp to 2.50%, while state median in China said over the weekend that it had "constructive talks" with the U.S. on trade in a high-level phone call. This was a fresh indication that there is more momentum and serious intent than in previous rounds of talks. The biggest directional driver of the yen will 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 (eventually) 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 would likely be seen in USD-JPY. In Japan, "Abenomics" has been getting a dusting down. Japanese PM Abe earlier in the month pledging a renewed push of fiscal stimulus, while BoJ Governor Kuroda had earlier in the week reaffirmed the central bank's commitment to monetary easing to achieve its 2% inflation target (he admitted that "it's taking time"). Regarding Japan's disinflation quagmire, 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.

    [GBP, USD]
    Cable printed a four-week high at 1.2985, which has drawn in the six-month high seen in last October at 1.3912. EUR-GBP has concurrently extended further into six-month low terrain, making low so far at 0.8521. The BoE's trade-weighted measure of the pound is still showing a decline of around 9% from levels prevailing ahead of the vote to leave the EU in July 2016, having pared this discount, which can be subbed the Brexit discount, from around 16%, which was seen at the lows in August when markets were fretting about the risk for a no-deal Brexit on October 31. Boosting the pound today were weekend polls showing PM Johnson's Conservative Party having extended its lead in opinion polls. This strengthens the odds for the party to win the December-12 election and be returned to Parliament with a working majority, which in turn suggests that the Brexit deal on the table will be implemented in January, when the UK will then enter a transition phase through to the end of 2020. This would avoid there being another referendum, and brings a slight degree of certainty to the UK outlook. Politicos poll tracker now indicates the Conservatives with 41% support, up 2 points from Friday, with second-spot Labour some way behind with 29%. The currency's gains are rooted in the markets view that Brexit will be delivered, but with a full transition period (which is likely to be extended for two years beyond the end of 2020). The risk for a no-deal Brexit scenario is now seen as much reduced as a consequence of the Brexit Party decision to not contest Tory-held seats at the election. This was a big back down for Nigel Farage's party, and came as opinion polls shifted toward the Conservatives and away from the Brexit Party.

    [USD, CHF]
    EUR-CHF has rebounded back above 1.0950 after printing a six-week low last Thursday at 1.0863. The euro was lifted by Brexit news, while a risk-on backdrop has also been conducive for weakening the Swiss franc. The two-and-a-half-year low seen in early September at 1.0811 has now swung back out of scope, for now.

    [USD, CAD]
    USD-CAD has nudged to a 10-day low at 1.3209 in what is now a third consecutive day of decline. This puts in some space from the five-month peak seen last week at 1.3270. The Canadian dollar's bid comes with oil prices hitting fresh highs, with the front-month future of the WTI benchmark posting a near two-month peak at $58.16. A risk-on mood is prevailing, which has supported the dollar-bloc currencies, offsetting the recent dovish turn at the BoC in the case of Canada's currency. Canada's data release highlights this week include CPI, retail sales and manufacturing, which will scrutinized in light of the BoC's bias to cutting rates as soon as its December policy meeting.

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