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By XE Market Analysis August 8, 2018 3:51 am
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    XE Market Analysis: Europe - Aug 08, 2018

    The Dollar has traded steady to modestly softer so far today. EUR-USD printed a four-session high of 1.1628, and the USD index (DXY) corrected for a second day after rallying for much of the previous week (in the wake of the Fed's upgrade on growth to "strong" from "solid"), though the Dollar remained above the respective lows it saw yesterday against Sterling, the Canadian Dollar and the Australian Dollar. USD-JPY continued to trade in a sideways range on a 111.0 handle, with today being the fifth consecutive session this has been the case. The 10-year JGB yield nudged higher for a second consecutive day, to 0.111%, although it's become clear that the BoJ will be maintaining a firm lid on yields despite last week tweaking its stimulus programs to allow for greater flexibility. The U.S. escalated the trade war with China by announcing they will levy tariffs on an additional $16 bln of Chinese imports from August 23, which came with data today showing China's trade surplus with the U.S. at near record highs (for context, Chinese imports to the U.S. are worth about 2% of U.S. GDP, and more accurately 1.2% when U.S. inputs are correctly factored, according to the Bureau of Economic Analysis). This saw the Shanghai Composite drop by nearly 1% today after rallying by nearly 3% yesterday. The news also had a dampening affect on equity markets across Asia, though most bourses were still showing gains following recent strong corporate earnings leads and the recent rally in oil prices. We are of the view that the Sino-U.S. trade war will continue to escalate, and this will in turn see USD-JPY break lower.

    [EUR, USD]
    EUR-USD printed a four-session high of 1.1628 as the USD index (DXY) corrected for a second day after rallying for much of the previous week (in the wake of the Fed's upgrade on growth to "strong" from "solid"). There is a view in markets that the U.S. currency will tend to firm as trade tensions with China ratchet higher, and while a lift in global stock markets has cooled this narrative, a fresh escalation in the trade way (the U.S. announced tariffs on an additional $16 bln of Chinese imports, effective August 23) could rekindled risk aversion. Overall, we still remain bearish of EUR-USD. The relative strength of the U.S. economy should be showcased by incoming data, which in turn should girder the Fed's course to further tightening (we expect two more 25 bp hikes in the Fed funds rate this year, one in September and another in December). Market participants are also facing two wildcards in Europe that carry potential to disrupt the EU applecart; one stemming from the evolving populist political landscape in Italy, and another being the palpable risk for there being a no-deal Brexit scenario. EUR-USD has resistance at 1.1597-00. The June low at 1.1508, which is the lowest level seen since July 2017, provides a downside waypoint.

    [USD, JPY]
    USD-JPY has continued to trade in a sideways range on a 111.0 handle, with today being the fifth consecutive session this has been the case. The 10-year JGB yield nudged higher for a second consecutive day, to 0.111%, although it's become clear to market participants that the BoJ will be maintaining a firm lid on yields despite last week tweaking of its stimulus programs to allow for greater flexibility. The U.S. escalated the trade war with China by announcing they will levy tariffs on an additional $16 bln of Chinese imports from August 23, which came with data today showing China's trade surplus with the U.S. at near record highs (for context, Chinese imports to the U.S. are worth about 2% of U.S. GDP, and more accurately 1.2% when U.S. inputs are correctly factored, according to the Bureau of Economic Analysis). This saw the Shanghai Composite drop by nearly 1% today after rallying by nearly 3% yesterday. The news also had a dampening affect on equity markets across Asia, though most bourses were still showing gains following recent strong corporate earnings leads and the recent rally in oil prices. While fundamentals remain bullish for USD-JPY, the Sino-U.S. trade war remains a bearish force for USD-JPY, with markets pricing in a degree of safe haven premium on the Yen. There are good reasons to expect for the trade confrontation to continue to escalate. Aside from the new tariffs on $16 bln of Chinese imports, the Trump administration is mulling a tariff hike on $200 bln of Chinese imports, and it's not unreasonable to assume that these will be confirmed later this month or early next. Trump perceives the advantage in the trade war to be his given the massive U.S. trade deficit with China, and given the U.S. economy is motoring and given that Trump, such as his proclivities are, will want to look strong before his base going into the midterm elections in November. At the same time, it's also reasonable to assume that Beijing will not yield, and play the long game, waiting to see how the chips fall for Trump at the November elections. USD-JPY has support at 110.98-111.00.

    [GBP, USD]
    Cable has remained heavy, failing to sustain recovery gains above 1.2950, after printing a fresh 11-month low at 1.2920 on Tuesday. This is now the fifth consecutive week of declines, which is the latest down phase in a bear trend that's been evolving since mid April, from levels near 1.4400. The most recent losses reflect a market asking for a bigger Brexit discount in Sterling, which we estimate to have been 10-15% in trade-weighted terms since the vote to leave the EU in June 2016. The discount took another ratchet after a senior government member said over the weekend that the odds for a no-deal Brexit are now higher than the odds are for achieving a new deal. This comes with Prime Minister May's government having become firmly stuck between a rock and a hard place, with most EU leaders backing the European Commission in rejecting much of British government's Brexit plan while a sizeable minority of May's Tory party think that the plan concedes too much to the EU. This raises the possibility for there being another referendum, while both the EU and UK have issued contingency-planning advice for a no-deal scenario (though officials have stressed that this is nothing more than a tactical consideration at this stage). We advise trend following with regard to Cable while keeping a weather eye on Brexit developments. The August 2017 low at 1.2774 provides a downside waypoint.

    [USD, CHF]
    EUR-CHF has rebounded above 1.1550 after printing a six-week low of 1.1498 on Monday, which extended a decline that was started by the dovish-tilting policy guidance of ECB President Draghi in July. The low is the nadir of a retreat from the two-month high that was posted in mid July at 1.1714. This cross still remains in a broadly sideways range that's been evolving since late May, which is a similar pattern that EUR-USD has been seeing.

    [USD, CAD]
    USD-CAD jumped back above 1.3000 after printing a near two-month low at 1.2962 yesterday. The stalling of the recent oil price rebound, coupled with the evident strong prevailing fundamentals of the U.S. economy, which is underpinning expectations for the Fed to hike two more times before the year is out, has given reason to buy USD-CAD on dips. Support comes in at 1.3009-10, and resistance at 1.3100.

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