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By XE Market Analysis April 25, 2018 2:41 am
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    XE Market Analysis: Europe - Apr 25, 2018

    The dollar picked up from correction lows, remaining underpinned after concomitantly posting trend highs yesterday after the 10-year T-note finally touched the 3.0% level first time here since early 2017. The narrow trade-weighted index (DXY) recouped to near 91.0 and yesterday's trend high at 91.07, a level last seen in the first week of January. EUR-USD drifted back toward the 1.2200 level, although so far leaving yesterday's three-month low at 1.2181. USD-JPY lifted back above 109.00 from yesterday's correction low at 108.54, but has so far left yesterday's 10-week peak at 109.20 untroubled. USD-JPY has been trending higher for a month now, from sub-105.00 levels. The dynamic has been concomitant with rising U.S. yields, with looser fiscal policy having given added underpinning to Fed tightening expectations. This comes with the BoJ continuing to peg JGB 10-year yields near 0.0%.

    [EUR, USD]
    EUR-USD drifted back toward the 1.2200 level, although so far leaving yesterday's three-month low at 1.2181. The low was seen after the release of a newly revamped Ifo business conditions index out of Germany, which now also includes services. The report didn't make nice reading as confidence declined sharply to a reading of 102.1 in April from 103.3 in the previous month, which added to growing sings of a flagging economic growth momentum in the Eurozone. With the Fed very much remaining on a tightening path, which have been intensified by the loosening of fiscal policy in the U.S., we expect the overall directional bias of EUR-USD to remain to the downside. A key level is 1.2154, which marks the low point of the broadly sideways range that's been play for nearly three months now. A lot of focus will be on ECB guidance at its meeting this week, which we expect to reaffirm the need for an amble degree of stimulus. EUR-USD has an initial resistance level at 1.2245.

    [USD, JPY]
    USD-JPY lifted back above 109.00 from yesterday's correction low at 108.54, but has so far left yesterday's 10-week peak at 109.20 untroubled. Ditto for EUR-JPY. Stock markets in Asia have been broadly lower following declines on Wall Street, with investors digesting higher yields -- the 10-year T-note finally touched the 3.0% level (and first time here since early 2017) -- and doubts about earnings growth. The S&P 500 closed out yesterday with a 1.3% loss, while the Nikkie 225 was showing a 0.3% loss in the late PM Tokyo session. This backdrop has likely curtailed yen selling, according to market narratives. In data, Japan's February industry activity index came in with 0.4% m/m growth, slightly below the median forecast for 0.5%. USD-JPY has been trending higher for a month now, from sub-105.00 levels. The dynamic has been concomitant with rising U.S. yields, with looser fiscal policy having given added underpinning to Fed tightening expectations. This comes with the BoJ continuing to peg JGB 10-year yields near 0.0%. Demand for foreign assets by Japanese life insurers has been a factor propping USD-JPY up so far in the new fiscal year, while an abatement in concerns about trade tensions and cooling relations on the Korean peninsular have also been in the mix. Overall, we advise following the trend in USD-JPY for now. Support comes in at 108.40-42.

    [GBP, USD]
    The pound has been faring better so far this week after underperforming last week, making a three-day high versus the euro while recouping above 1.3950 against the dollar. Better than expected government borrowing data out of the UK yesterday was something of a tonic, with the government having previously pledged to up spending should there been lower than expected deficit. Cable broke a run of six consecutive down sessions. We anticipate the pair will trade steady-to-lower into the May BoE monetary policy decision, when the bank will also release its latest quarterly inflation report. There has been a run of sub-forecast UK data (specifically retail sales, wages and inflation), while BoE Governor Carney last week threw a cat among the hawks, damping what had been a near universal expectation for the central bank to deliver a 25 bp hike in the repo rate on May 10th by saying that while there will be "a few interest rate rises over the next few years," he didn't want "to get too focused on timing."

    [USD, CHF]
    EUR-CHF has come off the boil since making a 39-month last Friday at 1.2005. The cross ebbed to a six-session low at 1.1926 yesterday, though subsequently rebounded to the upper 1.1900s. The franc's return to the 1.2000 level was symbolic "normalisation" that's been afoot in global markets, being the first time the currency has traded below the SNB's former trading cap, which it abandoned in January 2015 in the face of broad and unstoppable euro depreciation caused by ECB monetary stimulus. EUR-CHF is some 12% higher from the levels of mid last year. The franc was driven lower by the -0.75% Swiss deposit rate along with the widespread expectation for the SNB to remain strongly committed to negative interest rates until after the ECB starts tightening. The central bank's chairman, Jordan, said in Bloomberg interview last Thursday that the franc's declines are in the "right direction" and that the SNB remains "convinced that current monetary policy is still necessary." He had said earlier in the week that "we do not want to provoke an appreciation of the Swiss franc."

    [USD, CAD]
    USD-CAD has remained buoyant since posting a three-week high of 1.2861 during Tuesday's Asian session. The move extended a rebound from last Wednesday's two-month low at 1.2527. A correction in oil prices, which have descended back under $68.0 in the WTI benchmark market after making a 40-month high at $69.56, along with a generally firmer bias in the U.S. dollar and associated rise in U.S. Treasury yields, have driven the rebound in USD-CAD. The Canadian dollar had already been coming off the boil in the wake of last Wednesday's BoC policy meeting, as the statement indicated that the central bank would maintain its cautious stance on future policy changes, which remain data dependent. The latest price action in USD-CAD has negated the downside trend that had been in play over the prior three weeks, from levels near 1.3100.

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