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By XE Market Analysis May 25, 2018 3:48 pm
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    XE Market Analysis: Asia - May 25, 2018

    The dollar firmed up into the long U.S. weekend, with the narrow trade-weighted USD index (DXY) up by 0.5% heading into the London fix. The index logged a six-month peak at 94.25, which is the summit of a six-week run higher. EUR-USD posted a six-month low at 1.1646, and the dollar has seen new trend highs versus other currencies, although is near net flat in the case of the yen. Both the dollar and yen are operating as safe haven currencies, providing shelter from political angst in Europe and heightening geopolitical concerns. The biggest mover on the day was USD-CAD, which rallied to 1.2988 highs. The sharp correction in oil prices drove USD-CAD.

    [EUR, USD]
    EUR-USD posted a new six-month low on Spain's woes, at 1.1646. News that the Ciudadanos party has tabled a no-confidence motion against PM Rajoy has rattled Spanish markets. There isn't a prospect for a situation a la Italy, however. The hard-left Podemos party has been the only populist show in town, and its popularity has waned lately, though market participants will be fretting that there will be a repeat of the political impasse that was seen between 2015 and 2016, which saw two inconclusive general elections and a lot of political bickering and failed deals. The risk is that the uncertainty will set back Spain's market-friendly reform efforts. This looks set to be the sixth consecutive down week for EUR-USD. We continue to advise trend following, though caution that the extent and duration of the down trend has been looking stretched by historical price norms.

    [USD, JPY]
    USD-JPY recovered 109.48 highs, after bottoming at 109.13 early in the session. The lift has reflected part broader dollar firmness and part broader yen weakness. Stock markets recovered some poise Asia. The yen rallied when the Trump administration cancelled the planned summit with North Korea, though with Pyongyang saying that it would still be willing to meet with the U.S., and Trump saying "maybe", yen softness returned.

    [GBP, USD]
    Cable settled in the low 1.33s, above the intraday low at 1.3306 and Wednesday's five-month nadir at 1.3305. Today's second release of UK Q1 GDP was unrevised at 0.1% q/q growth, and 1.2% in the y/y comparison, had been widely anticipated. Overall, we expect Cable to retain a flat to heavy bias.

    [USD, CHF]
    EUR-CHF printed another near three-month low on Friday, bottoming at 1.1540, as the euro came under broad pressure. Spain was the culprit this time,after centrist party Ciudadanoes, which holds the balance of power in parliament, said it would back a no-confidence vote against Prime Minister Rajoy amid the corruption scandal that has engulfed his party. The souring sentiment towards the euro started with concerns about the policies of the newly forming anti-establishment and Eurosceptic coalition government in Italy. EUR-CHF is down sharply from the 41-month high that was printed a month ago at 1.2005, which was the culmination of a 10-month rally phase, and which in turn was a reflection of what had been -- before recently -- a sense of abating existential risks that the Eurozone was facing. Now things look to be trending back in the other direction.

    [USD, CAD]
    USD-CAD topped at near three-week highs of 1.2988, up from 1.2891 lows into the North American open. The sharp sell-off in WTI crude was the main driver. Looking ahead, traders will start to eye shorter term Tsy/GoC spreads, with the CAD expected to benefit from a narrowing of spreads, currently in the USD's favor. A BoC July rate hike, along with a recently more dovish sounding BoC, should see spreads narrow.

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