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By XE Market Analysis February 18, 2019 11:31 am
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    XE Market Analysis: Asia - Feb 18, 2019

    AUD-JPY has been the biggest mover in a day of directionally challenged markets, with North American markets absent and participants waiting on progress from the U.S.-China trade talks, which will resume for an extended second week in Washington after terminating in Beijing last week with "progress" but without resolution. AUD-JPY settled off highs, but with a moderate 0.3% gain. The cross printed a two-session high at 79.19, while AUD-USD posted a 13-day high, at 0.7160. The gains reflect optimism about China, which is the export-oriented Australian economy's biggest client. The Dollar itself recovered after a spell of declining during the London AM session. The narrow trade-weighted USD index lifted to levels around 96.80 after posting a two-session low at 96.65, while EUR-USD and Cable concurrently ebbed after seeing respective two-session highs at 1.1333 and 1.2938. USD-JPY was buoyant, near 110.50, after printing a high at 110.61. Stock markets in Europe traded without direction in Europe, as were S&P 500 futures, following a bullish session in Asia, led by the solid 2.7% closing gain of China's SSE index. Market participants are also looking to fresh dovish turns from the ECB and the Fed, the latter of which will see the minutes to the late-January FOMC meeting published this Wednesday, which, together with a busy slate of Fed speakers this week, will shed further light on what the Fed is thinking on policy, including the pace of balance sheet shrinkage. ECB's Olli Rehn and his colleague Villeroy spoke of the slowing in the Eurozone economy.

    [EUR, USD]
    EUR-USD ebbed back after seeing a two-session high at 1.1333. The high extended the rebound from the three-month low seen on Friday at 1.1234, which had been seen set amid speculation that the ECB is heading for another blast of Targeted Long-Term Refinancing Operations (TLTRO) to buoy bank lending. ECB's Olli Rehn said in a German press interview published over the weekend that recent data showed a weakening in the Eurozone economy, while his colleague Villeroy spoke today of a "significant" slowdown afoot. The comments confirm that the ECB could change its guidance on rates if the slowdown proves persistent, which, as Villeroy pointed out, also depends on whether politicians can resolve the current uncertainty. TLTROs clearly also remain an option if things got worse, but so far the message on that front has been that the ECB needs a solid monetary policy reason to consider that, and so far it seems markets seem more keen on the idea than the central bank. The Fed, meanwhile, is also amid a dovish phase. Markets are expecting this Wednesday's release of the Fed's minutes from the late-January FOMC meeting to show policymakers in a cautious mood, and also show a deceleration in the pace of post-QE balance sheet shrinkage. Overall, we expect the EUR-USD to proceed with a flat-to-lower directional bias. Resistance comes in at 1.1335-40.

    [USD, JPY]
    USD-JPY posted a two-day high at 110.61. AUD-JPY, meanwhile, gained nearly 0.5%, marginally beating EUR-JPY into second spot in the biggest mover stakes. This reflects part moderate Aussie dollar outperformance and part moderate yen underperformance. The cross came off its highs, however, with risk appetite fading across European equity bourses, and with S&P 500 futures showing fractional declines, failing to follow the upbeat session in Asia. AUD-JPY printed a two-session higher during the Sydney session at 79.14, since settling near the 79.0 mark. AUD-USD posted a 13-day high, at 0.7159. The pair is up 1.4% on the year-to-date, and by 2.3% and 2.8% against the yen and euro, respectively, over the same period. Much of the gains reflect the Aussie dollar's recovery from late-December losses, build on the view that the U.S. and China will reach some sort of compromise on the trade front, and by the encouragement of Beijing's stimulus efforts. The antipodean currency is widely treated as a liquid forex market proxy on China. In Asian stock markets, the MSCI Asia-Pacific (ex-Japan) equity index rose by nearly 1%. Japan's Nikkei 225 closed with a 1.8% gain, while China's SSE outperformed with a gain of 2.7%. Hopes that the U.S. and China will reach a deal during this week's discussions in Washington, alongside hopes that major central banks will return to the stimulus taps again, have been underpinning investor positivity. Any good news on this front would have the potential to spark a rally in USD-JPY. The pair has support at 109.90-94, and resistance at 111.05-07.

    [GBP, USD]
    Cable has lodged back above 1.2900, aided higher by earlier bouts of dollar weakness. Data out of the UK today showed January house price growth to be at the weakness y/y rate since 2009, at just 0.2%, according to Rightmove. Stretched affordability, higher purchase taxes for rental properties, along with Brexit uncertainty are blamed. On the Brexit front, news that seven Labour party members quit to become a group of independents raised eyebrows, although long since rumoured, and the development highlights the Brexit-caused fractures that have been afflicting both of the principal parties in the UK. A central reason, if not the central reason, why Prime Minister May has refrained from making compromises that would win both the support of the majority in parliament and Brussels (which would involve remaining in the EU's customs union), is the fear this would drive an irrevocable split in her Tory party. Brussel's today once again affirmed that the EU won't reopen negotiations on the existing Withdrawal Agreement. The next key data for the calendar is February 27, when parliament will vote on the government's plan, if there is one, or alternatives. It is also possible that parliament might at that juncture vote to rule out a no-deal Brexit scenario. The continued lack of clarity, and the continued threat of a no-deal Brexit scenario, should maintain the 13-15% discount the pound has been trading at in trade-weighted terms since the vote to leave the EU in June 2016.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.1300s after a third-day decline, which on Friday left a six-day low at 1.1332. This extended the decline from the five-day high that was seen Tuesday at 1.1406. The price action has continued a phase of relatively high volatility that the cross has been experiencing. Since early January there have been several bouts of pronounced underperformance in the Swiss franc, often accompanied by talk/suspicions of SNB intervention. SNB vice president, Zurbruegg, said last month that the franc "remains highly valued" and the situation on foreign currency markets is "still fragile" and that the SNB's two pillar strategy of negative interest rates and ad-hoc currency interventions, or threat thereof, "remains appropriate." SNB Chairman Jordan said recently that for 2019 the biggest concerns are "political mistakes," pointing to the U.S.-China trade war and "Brexit and the European situation." Jordan also expressed concern about further safe-haven driven franc appreciation, "especially" in a no-deal Brexit scenario.

    [USD, CAD]
    USD-CAD has ebbed back to the lower 1.3200s, down from the three-week seen last week at 1.3340. A rally in oil prices, which has lifted the WTI benchmark to three-month highs above $56.50, has underpinned the Canadian Dollar. There are also market expectations for the release of the Fed's minutes to show the central bank to be lessening the rate of post-QE balance sheet shrinkage. USD-CAD has resistance at 1.3266-70, and support at 1.3196-98.

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