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By XE Market Analysis August 9, 2018 2:52 am
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    XE Market Analysis: Europe - Aug 09, 2018

    The Dollar has been lacking direction so far today, overall, though gained about 1% versus an underperforming New Zealand Dollar, which dropped sharply on the lead of the RBNZ's dovish guidance after the central bank left the official cash rate unchanged at 1.75%. NZD-USD posted a 29-month low at 0.6664. EUR-USD, meanwhile, has been holding in a narrow range in the lower 1.1600s, below yesterday's five-session peak at 1.1628. USD-JPY printed a two-week low at 110.70 before recouping to the 111.0 area. EUR-JPY and other yen crosses have seen a similar down-and-up price action. A 2% rally in the main Chinese equity indexes helped lift risk appetite in broader markets, which was hinged partly on expectations for fiscal stimulus and partly on Beijing's announcement of a new government body to oversee the development of the nation's tech sector. This backdrop saw the Yen's safe haven premium unwind a little. The PBoC set the USD-CNY reference rate at 6.8317, near unchanged from yesterday's 6.8313 fix.

    [EUR, USD]
    EUR-USD has settled in the lower 1.1600s ,below the five-session peak that was seen yesterday at 1.1628. 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 could rekindle 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 printed a two-week low at 110.70 before recouping to the 111.0 area. EUR-JPY and other yen crosses have seen a similar down-and-up price action. A 2% rally in the main Chinese equity indexes helped lift risk appetite in broader markets, which was hinged partly on expectations for fiscal stimulus and partly on Beijing's announcement of a new government body to oversee the development of the nation's tech sector. This backdrop saw the Yen's safe haven premium unwind a little. Overall, for USD-JPY, we still place greater odds for there being a downside breakout that a sustained rally as we expect the Sino-U.S. trade war to continue to escalate. USD-JPY has a series of daily lows that were seen during the latter part of July between 110.58 and 110.76, which now mark a key support zone.

    [GBP, USD]
    The Pound remains heavy after falling sharply yesterday, extending a little lower during the Asian session today, printing a new one-year low at 1.2852. Her Majesty's currency is also nursing hefty losses against the Euro and Yen, and has now racked up an average decline of more than 4% on the year-to-date against the G3 currencies. In trade weighted terms the pound is now trading just over 15% below levels that were prevailing ahead of the vote to leave the EU in June 2016. Recent losses have reflected a growing concern that the British government, which is fragile and divided over the Cabinet's Brexit plan, will be capable of hammering out a new agreement for a future relationship with the EU, which for its part has collectively indicated that it will reject much of the UK's proposals, as they stand. This raises the spectre of the UK leaving the EU next March without sufficient bureaucratic or logistic preparedness (over a whole host of things ranging from customs to and security, with the police warning yesterday that the UK would lose access to EU-wide security powers and databases in a no-deal scenario). A no-deal exit would also mean trade with the EU would revert to WTO rules, which most economists see as being costly for both the UK and EU.

    [USD, CHF]
    EUR-CHF has been re-established above 1.1500 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 has dropped back to the lower 1.3000s after posting a two-week high at 1.3126 yesterday. We advise buying USD-CAD given the renewed pressure on oil prices and given 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. Support comes in at 1.3008-10, and resistance at 1.3100.

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