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By XE Market Analysis October 8, 2019 7:20 am
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    XE Market Analysis: North America - Oct 08, 2019

    The dollar has been trading mixed, losing ground to the yen and euro while gaining versus an underperforming pound and the dollar block currencies, which drafted lower as risk appetite dropped away during the European morning session. The yen's habit of inversely tracking stock markets has been on full display today, falling as stocks rose in Asia, where Chinese markets reopened after a week-long hiatus, before firming back as European stock markets turned lower. S&P 500 futures were showing a loss of over 0.5% heading into the New York interbank open having earlier been showing a gain of nearly 0.5%.USD-JPY retreated back under 107.00 after peaking at 107.44 during the Tokyo session. EUR-JPY and AUD-JPY dropped back from respective six-day and one-week highs as the Japanese currency picked up bids. EUR-USD lifted to the top of a narrow range, near 1.1000. Sterling took a skid as market participants factor in no deal being reached by the UK and EU. The currency lost nearly 0.5% versus the dollar and over 0.5% against the euro, and in the bigger picture continues to trade with about a 14-15% discount in trade-weighted terms compared to levels prevailing ahead of the vote to leave the EU in June 2016. It remains difficult to see if concessions on both sides are possible with regard to the Irish border issue; how to achieve a "clean" Brexit while at the same time maintaining the Good Friday Peace Agreement in a way that is satisfactory to both sides -- a paradoxical case of an unstoppable force meeting an immovable object.

    [EUR, USD]
    EUR-USD has edged lower, drawing in Friday's low at 1.0957. More worrisome data came out of Germany, where manufacturing orders contracted by 0.6% m/m in August and the October Sentix investor confidence fell to its lowest levels since the dark days of 2009. Both the Eurozone and U.S. economies are experiencing economic slowing, though the former is clearly at a more advanced stage, and near to tipping into recession. EUR-USD has been in a clear bear trend since early 2018, descending from levels above 1.2500 over this time period. Last Monday's 28-month low at 1.0879 marked a reaffirmation of this trend.

    [USD, JPY]
    The yen has been inversely tracking stock markets, falling as stocks rose in Asia, where Chinese markets reopened after a week-long hiatus, before firming back as European stock markets turned lower. S&P 500 futures were showing a loss of over 0.5% heading into the New York interbank open having earlier been showing a gain of nearly 0.5%.USD-JPY retreated back under 107.00 after peaking at 107.44 during the Tokyo session. EUR-JPY and AUD-JPY dropped back from respective six-day and one-week highs as the Japanese currency picked up bids. Market narratives are showing a mixed view with regard to U.S.-China trade talks. U.S. and Chinese deputy trade negotiators yesterday commenced two days of preliminary talks ahead of the first top-level ministerial negotiations in seven months. Better than expected earnings from South Korea's bellwether Samsung Electronics were also in the mix, though there was also news that eight Chinese technology companies were put on the U.S. blacklist, to which China is almost certain to take retaliatory measures. German industrial production came in above forecasts, though this was accompanied by a contraction in orders and a deterioration in business sentiment. As for the U.S.-China trade situation, a circumspect view seems warranted. A narrow deal may be in the offing, but Beijing is not set on conceding to U.S. demands on intellectual property or its practice of subsiding industry. An angsty vibe looks likely to persist in global markets.

    [GBP, USD]
    Sterling took a skid as market participants factor in no deal being reached by the UK and EU. The currency lost nearly 0.5% versus the dollar and over 0.5% against the euro, and in the bigger picture continues to trade with about a 14-15% discount in trade-weighted terms compared to levels prevailing ahead of the vote to leave the EU in June 2016. It remains difficult to see if concessions on both sides are possible with regard to the Irish border issue; how to achieve a "clean" Brexit while at the same time maintaining the Good Friday Peace Agreement in a way that is satisfactory to both sides -- a paradoxical case of an unstoppable force meeting an immovable object. If there is no agreement, then UK Prime Minster Johnson won't have a deal by the October-19 deadline set out in the newly created parliamentary bill that would require the prime minister to ask the EU for an extension in Brexit to January 31. Johnson has continued to assert that the UK would leave the EU without a deal on October 31 regardless, but that this is likely bluster; an attempt to both keep pressure on the EU and please Brexit voters. Attempting to pull the UK out of the EU on October 31 -- i.e. ignore the new legislation, as some in the opposition fear -- would be politically risky for him when he could easily lay the blame at the oppositions' feet. More likely Johnson would in this scenario acquiescence for an extension while making a big show of blaming the opposition. An election would then be staged in November or early December. In the event that Johnson's Conservative Party won (and they are favourites according to polling) then the same Irish border problem will be faced all over again. But this time, assuming Johnson carried a majority in Parliament, the PM would be able to make good on his threat to take the UK out of the EU without a deal.

    [USD, CHF]
    EUR-CHF has drifted lower after last week printing a two-week-plus high at 1.0979, extending a rebound from the 27-month low seen in early September at 1.0811.The cross has since settled to near the 1.0900 mark. Suspicions of SNB intervention abounded last week, which made sense from a tactical perspective, with the central bank having stood aside when then cross was downward trending amid broader euro underperformance before stepping in when EUR-USD was on the ascent. At its recent quarterly policy review, the SNB reaffirmed its long held view that the franc remains "highly valued", while highlighting fragile markets and affirming the commitment to intervene in currency markets if needed. The franc regularly tops the Economist magazine's Big Mac purchasing parity comparison of currencies as being the most overvalued currency.

    [USD, CAD]
    USD-CAD has lost upside traction after rallying quite sharply in the latter part of last week. A basing and rebound price action in oil prices have returned some support to the Canadian dollar, or at least undermined the prime factor that had been weighing on the currency. WTI front-month crude prices are up about 4% from the lows seen last week, which were a culmination of a near 20% plunge from the highs seen in the immediate wake of the attack on Saudi crude facilities. Bigger picture, USD-CAD has been trending upwardly since the mid-July low at 1.3016. Bigger bigger picture, the pairing has been amid a sideways chop since mid January, ranging from 1.3016 on the downside to 1.3565 on the upside. More of the same looks likely.

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