XE Market Analysis: Europe - Jan 14, 2020

A fresh injection of risk-on trading saw the yen decline further, while most Asian stock markets continued to rally. China reported its first y/y increase in exports in five months, of 7.6%, which beat the consensus forecast for 3.2% growth, while a source cited by Reuters said that Beijing has pledged to buy an addition $80 bln worth of manufactured goods from the U.S. over the next two years, in addition to more than $50 bln in energy supplies and $35 of U.S. services. Details of the phase-1 U.S.-China trade deal, due to be signed at the White House tomorrow, haven't been officially publicized, so the figures reported by Reuters gave investor spirits a boost. This comes with the U.S. having yesterday dropped its "currency manipulator" tag on China. The developments saw the yuan rise to a five-month high today. USD-JPY posted a new trend high at 110-21, the first time the pair has traded above 110.00 since last May. Yen crosses followed suit, with EUR-JPY pegging a six-month high and AUD-JPY a 12-day peak. While AUD-USD dipped below its Monday's low, printing a nadir at 0.6885, the Australian currency, widely seen as a forex proxy of China, recouped to near net unchanged levels around 0.6900. Yesterday's fresh 1.5%-plus decline oil prices, which saw front-month WTI futures hit a near-six-week low at $57.91, weighed on the Canadian dollar, aiding USD-CAD rise above its Monday high on route to a peak at 1.3069. The pound posted fresh lows against the euro while remaining heavy against the dollar in the wake of yesterday's UK data misses and dovish BoE-speak. EUR-GBP saw a seven-week high at 0.8592, while Cable ebbed moderately, although remained above the 19-day high seen yesterday at 1.2961. EUR-USD remained in an narrow range below the six-day high seen yesterday at 1.1147.

[EUR, USD]
EUR-USD remained in an narrow range below the six-day high seen yesterday at 1.1147. EUR-JPY, meanwhile, posted a five-month high today, and EUR-GBP a seven-week high. The dollar itself has lost some buoyancy in the wake of last Friday's below-forecast U.S. jobs report for December. U.S. nonfarm payrolls missed with a rise of 145k, while wages and hours worked were soft. Markets are factoring in about a 55% chance for the Fed to cut by 25 bps or more by year end, up from about the 50% odds being given ahead of the jobs report. The ECB, meanwhile, is embedded in a wait-and-see policy stance. EUR-USD has been trending lower since early 2018, dropping from levels near 1.2500 and posting a 32-month low at 1.0879 in early October, the current nadir of the trend. Momentum has faded with the Fed having back out of its tightening cycle after hiking rates three times last year.

[USD, JPY]
A fresh injection of risk-on trading saw the yen decline further, while most Asian stock markets continued to rally. China reported its first y/y increase in exports in five months, of 7.6%, which beat the consensus forecast for 3.2% growth, while a source cited by Reuters said that Beijing has pledged to buy an addition $80 bln worth of manufactured goods from the U.S. over the next two years, in addition to more than $50 bln in energy supplies and $35 of U.S. services. Details of the phase-1 U.S.-China trade deal, due to be signed at the White House tomorrow, haven't been officially publicized, so the figures reported by Reuters gave investor spirits a boost. This comes with the U.S. having yesterday dropped its "currency manipulator" tag on China. The developments saw the yuan rise to a five-month high today. USD-JPY posted a new trend high at 110-21, the first time the pair has traded above 110.00 since last May. Yen crosses followed suit, with EUR-JPY pegging a six-month high and AUD-JPY a 12-day peak. We retain a bullish view of USD-JPY. The U.S. is enjoying what looks like a goldilocks economy -- growth slower, but still holding comfortably in positive expansion with inflation remaining benign -- while the risk-on vibe in global markets should maintain Japan's yield-hungry investors' confidence in foreign investments.

[GBP, USD]
The pound posted fresh lows against the euro while remaining heavy against the dollar in the wake of yesterday's UK data misses and dovish BoE-speak. EUR-GBP saw a seven-week high at 0.8592, while Cable ebbed moderately, although remained above the 19-day high seen yesterday at 1.2961. The lows were seen concurrently with a drop in UK yields following sub-forecast November production and GDP data out of the UK yesterday, which followed hot on the heels of dovish-tilting remarks from BoE MPC members Vlieghe and Carney. The UK's Institute for Government also warned that it will be impossible to deliver the computer systems for the special Brexit arrangements for Northern Ireland's border by the end of the year, while Ireland's deputy prime minister Coveney said that forming a new trade deal between the EU and UK is "probably going to to take longer than a year." Cable earlier printed an eighteen-day low at 1.2961. We expect the pound will retain a downward bias for now. UK December inflation data on Wednesday is expected to show a continued benign picture, with the CPI headline forecast at 1.5% y/y (median same), which would be unchanged from the month prior and remain well off the BoE's 2.0% mandated target. The UK OIS market is now fully factoring in a 25 bp BoE rate cut by September, and is implying about 50-50 odds for such a rate cut as soon as the January-30 MPC meeting.

[USD, CHF]
EUR-CHF found a footing after posting a 32-month low at 1.0788 last week following news of Iran's missile strike on two U.S. bases in Iraq. A reversal in risk-off positioning supported the cross with both the U.S. and Iran having stepped back from the cliff edge. The franc continues to play a role as a safe-haven currency, despite the hostile monetary policy of the SNB. Yesterday's low was the culmination of quite a sharp drop from the seven-week peak of December 13, at 1.1033.

[USD, CAD]
Yesterday's fresh 1.5%-plus decline oil prices, which saw front-month WTI futures hit a near-six-week low at $57.91, weighed on the Canadian dollar, aiding USD-CAD rise above its Monday high on route to a peak at 1.3069. Oil prices have fallen back by nearly 12% as a consequence of the de-escalation in tensions between the U.S. and Iran, with once consequence being USD-CAD putting in some distance from the three-month low seen on December 31 at 1.2951. Last Friday's dual releases of the December employment reports out of the U.S. and Canada, saw the former miss and the latter exceed expectations a little, though the impact on USD-CAD wasn't long standing with the pair recouping losses seen in the immediate wake of the data.