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By XE Market Analysis October 28, 2019 8:19 am
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    XE Market Analysis: North America - Oct 28, 2019

    The pound and the euro has seen modest strength after the EU affirmed that a three-month Brexit extension would be permitted to the UK, which effectively rule out a no-deal Brexit this Thursday (being October 31). Cable posted a high at 1.2859, which is just 4 pips shy of the peak seen on Friday, before ebbing back to around 1.2830, which still left the pound at modestly higher levels on the day. Sterling also saw gains versus the euro and other currencies, though follow-through was similarly lacking. EUR-USD lifted after declining by about a net 0.5% last week in settling just below 1.1100, which corrected some of the gains seen in the prior three weeks, from levels below 1.0900. Elsewhere, USD-JPY edged out an 11-day high at 108.79, surpassing Friday's high by 2 pips, while EUR-JPY, AUD-JPY and most of the other main yen crosses have remained within their respective Friday ranges. Stock markets in Asia and Europe rallied, underpinned by the Trump administration stating that that U.S. and Chinese trade negotiators had "made headway on specific issues."

    [EUR, USD]
    EUR-USD is slightly firmer today after declining by about a net 0.5% last week in settling just below 1.1100, which corrected some of the gains seen in the prior three weeks, from levels below 1.0900. Brexit develops have been buffeting the euro. Despite last week's loss, the pair remains about 1.4% up on month-ago levels reflecting the pricing out of no-deal Brexit risk on October 31, which had been posing a threat to the Eurozone economy. The Brexit saga is far from over, however, and there remains a theoretical risk of a no-deal scenario, although now further down the track. ECB's Draghi, at his final policy meeting last week, left both policy and guidance unchanged. Incoming President, Christine Lagarde, is expected to bring a more dovish tilt to the central bank. The Fed meets on monetary policy this week (announcing Wednesday) where a 25 bps has been fully discounted, and where the focus will be on guidance. We expect the Fed will indicate that this is another "insurance move" as the economy doesn't warrant any help. Such guidance would likely given the dollar a lift as there is about a 28% probability priced in to Fed fund futures for an additional 25 bps cut in December. Taking a step back, 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 Bund yield dropping from levels over 0.70% to the prevailing -0.350% yield (a -0.739% low was seen in early September).

    [USD, JPY]
    USD-JPY edged out an 11-day high at 108.79, surpassing Friday's high by 2 pips, while EUR-JPY, AUD-JPY and most of the other main yen crosses have remained within their respective Friday ranges. The yen will remain directionally sensitive to global stock market performance. Asian stock markets rallied today, underpinned by the Trump administration stating that that U.S. and Chinese trade negotiators had "made headway on specific issues." The S&P 500 posted a record high on Friday. USD-JPY remains a short distance from the 12-week high seen earlier in the month at 108.94. The BoJ policy meeting this week (concluding Thursday) is in scope. Reuters cited sources saying that policymakers are leaning towards keeping monetary policy unchanged given the apparent truce in U.S.-China trade warring and with financial markets steady. The BoJ last week warned today about riskier lending practices of financial firms as a consequence of super accommodative monetary conditions.

    [GBP, USD]
    Cable posted a high at 1.2859, which is just 4 pips shy of the peak seen on Friday, before ebbing back to around 1.2830, which still leaves the pound at modestly higher levels on the day. Sterling also saw gains versus the euro and other currencies, though follow-through was similarly lacking. The UK currency has started the week showing a net loss of about 1% against the dollar from week-ago levels, and respective declines of 0.9% and 0.5% against the yen and euro over this time. A snarling up in the Brexit process weighed on the pound last week, though recent developments are showing a away forward, with the EU27 agreeing a three-month extension, and the Liberal Democrats and SNP parties (having given up hope for generating enough support for a second referendum) proposing a means of triggering an out-of-cycle election by tabling a bill that would require only a simple majority in Parliament rather than the two-thirds majority support required by the government's proposal for an election. This suggests an election is on the cards for early December. PM Boris Johnson's Conservative Party is leading in the polls by 13 points (according to Politico's poll tracker), though voting pacts among opposition parties pose a threat to Boris. All possibilities remain open with regard to have Brexit becomes resolved, ranging form no-deal (on January 31), to a deal with multi-year transition period, to a second referendum, to a Brexit being cancelled scenario. The the lead of the Conservatives in the polls, we expect the pound's upside with remain in check.

    [USD, CHF]
    EUR-CHF has been lifted recently by the diminishing in no-deal Brexit risks, which has been supportive of the euro. The cross last week printed a two-and-a-half-month high at 1.1059 and has since remained buoyant.

    [USD, CAD]
    USD-CAD has posted a modest rebound, today edging above Friday's high in making a peak at 1.3078. The pair is fractionally down from week-ego levels, and is off by 1.3% from month-ago levels. Recent declines have been concomitant with near 11% rally in oil prices from early October lows, which is a positive lead for the Canadian dollar. An improvement in risk appetite in global markets has been at play, which has lifted the commodity-correlating dollar bloc currencies. The truce in U.S.-China trade warring and the ruling out of a no-deal Brexit scenario on October 31, have been positives for investor sentiment. A one-year low at 1.3016, seen back in July, provides a downside focal point for USD-CAD.

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