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By XE Market Analysis October 31, 2019 7:23 am
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    XE Market Analysis: North America - Oct 31, 2019

    The dollar posted fresh lows, extending losses that were imparted by the Fed's policy guidance yesterday. The yen, meanwhile, outperformed amid a safe-haven driven rally that was catalyzed by a Bloomberg report citing 'in the know' sources saying that China is pessimistic that a comprehensive and long-term trade can can be made with the "impulsive" Trump, and fear that he might pull out of the pending partial agreement (which appears to have hit a snag, with Beijing objecting to the quantities of U.S. agricultural produce that the White House is demanding China buys). The news, which came after the close of Chinese markets, saw S&P 500 futures spin lower, going from near flat to a 0.3% loss. USD-JPY posted an intraday losses of nearly 0.5%, with the pair hitting a 16-day low of 108.23. The yen was little affected by a dovish shift in the BoJ's policy guidance today. The narrow trade-weighted USD index (DXY) printed a 10-day low at 97.22, while EUR-USD pegged a 10-day high at 1.1175, and Cable edged out a nine-day high at 1.2960. Elsewhere, a hefty bout of AUD-JPY selling dragged AUD-USD lower, which tumbled from a three-week peak at 0.6929 back under 0.6900. USD-CAD held relatively steady, in the mid 1.3100s after rallying yesterday after the BoC managed to out-dove the Fed.

    [EUR, USD]
    EUR-USD pegged a 10-day high at 1.1175, which is the culmination of dollar losses seen in the wake of the Fed's guidance on monetary policy yesterday. To recap, the Fed trimmed rates by 25 bps, as had been widely expected, and successfully pulled off a 'dovish pause' forward guidance by stressing that tightenings are off the table, with Chair Powell indicating the FOMC won't even consider rate hikes until inflation is back at the 2% target. This offset the Fed's apparent hitting of the pause button on easings for the rest of the year, with Powell saying that the current stance looks appropriate, and won't be changed unless there's a "material reassessment" of conditions. This has come with the euro having recently been buoyed by developments in the UK, that ruled out a no-deal Brexit scenario (for now). EUR-USD has now rallied for four consecutive days, drawing in on the 11-week peak seen on October 20. To note, ECB President, Christine Lagarde, is expected to bring a more dovish tilt to the central bank, and we still class the pairing 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 -0.39% yield (a -0.739% low was seen in early September).

    [USD, JPY]
    Yen safe haven buying kicked in on a Bloomberg report citing 'in the know' sources saying that China is pessimistic that a comprehensive and long-term trade can can be made with the "impulsive" Trump, and fear that he might pull out of the pending partial agreement (which appears to have hit a snag, with Beijing objecting to the quantities of U.S. agricultural produce that the White House is demanding China buys). The news, which came after the close of Chinese markets, saw S&P 500 futures spin lower, going from near flat to a 0.3% loss. The yen concomitantly rose, pressing USD-JPY to intraday losses of nearly 0.5%, with the pair hitting a 16-day low of 108.23. The biggest movement out of the main dollar pairings and associated cross rates have been AUD-JPY and CAD-JPY, which are showing declines of over 0.5% at prevailing levels. The yen has been little affected by a dovish shift in the BoJ's policy guidance today, with the central bank stating that it now expects short- and long-term interest rates "to remain at present or lower levels as long as needed to pay close attention to the possibility that the momentum toward achieving its price target will be lost," dropping the line in the previous statement that it was committed to ultra-low rates "at least until the spring of 2020." The BoJ also trimmed inflation forecasts.

    [GBP, USD]
    Cable edged out a nine-day high at 1.2960, reflecting both a weaker dollar following the Fed's 'dovish pause' policy guidance and buoyancy of the pound. The Brexit deal is, for now, off the agenda with the political parties in the UK now gearing up for a December-12 general election. The UK currency is now showing a 5% averaged gain versus the dollar, euro and yen from month-ago levels versus, and is up by over 8% against the dollar from the major-trend low that was seen in early September. The gains reflect a partial unwinding in the Brexit discount markets have been demanding of the pound, though we estimate the currency is still trading with about a 8-9% discount in trade-weighted terms compared to levels prevailing just ahead of the vote to leave the EU in June 2016. The Brexit saga is not over, and all options remain open -- from a no-deal Brexit to Brexit-cancelled, depending on the election results. PM Johnson's Conservative Party has a 13 point lead on the Labour Party, though this election is coming amid a highly unusual circumstance and many political pundits in the UK have been emphasizing there is a high level of unpredictability, despite what polls might suggest. Small parties are likely to play a much bigger role than normal with voting pacts among opposition parties aiming to ensure that the pro-EU vote isn't split. There is also a risk of a hung parliament -- a political stalemate -- which would in this scenario probably lead to a second referendum on EU membership as a last-resort means to bring Brexit to a conclusion. Overall, we don't advise following pound gains at this juncture.

    [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 rallied sharply over the last day with the BoC managing to out-dove the Fed, with GoC yields plunging after Canada's central bank opened the door wide to a near term rate cut, while delivering the as-expected steady rate announcement. The BoC observed that Canada has not been immune to the developments globally. USD-CAD spiked to a high of 1.3208 before settling in the mid 1.3100s. The pair remains up by about 1% from the three-month low seen earlier in the week at 1.3042. The tapering out of the recent 10%-plus rally in oil prices has also taken some support away from the Canadian currency.

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