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By XE Market Analysis August 10, 2018 3:24 am
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    XE Market Analysis: Europe - Aug 10, 2018

    The Dollar has rallied strongly into the London interbank open, driving EUR-USD to a 13-month low of 1.1448, Cable to fresh one-year lows under 1.2800 and AUD-USD to three-week lows. The Greenback has also posted gains against most other currencies, most notably the Turkish Lira, which has tumbled to fresh record lows. USD-JPY has lifted out of a two-week low, while Yen crosses have traded lower, partly driven by flagging global equity markets and partly in the wake of above-forecast Japanese Q2 GDP data, which rose 0.5% q/q, above the median forecast for a 0.3% q/q rise. USD-JPY has lifted toward 111.0 after earlier printing a two-week low at 110.67. The Dollar's ascent has been concomitant with a bout of risk aversion on investor concerns about an escalating trade war, and the impact of U.S. sanctions on Turkey and Iran. Beijing today doubled down in the face of domestic criticism about its stance in the trade spate with the U.S.

    [EUR, USD]
    EUR-USD has dived to 13-month lows under 1.1450 amid a broad rally in the Dollar, which ascent has been concomitant with a bout of risk aversion on investor concerns about an escalating trade war, and the impact of U.S. sanctions on Turkey and Iran. Beijing today doubled down in the face of domestic criticism about its stance in the trade spate with the U.S. There has been a dominant view in markets that the U.S. currency will tend to firm as trade tensions with China ratchet higher. We 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 June's low at 1.1508 has now reverted to a resistance level.

    [USD, JPY]
    USD-JPY and Yen crosses are lower today, partly driven by flagging global equity markets and partly in the wake of above-forecast Japanese Q2 GDP data, which rose 0.5% q/q, above the median forecast for a 0.3% q/q rise. USD-JPY printed a two-week low of 110.67, while EUR-JPY and AUD-JPY forayed into six-week and one-month low territory, respectively. Japan's June tertiary (service sector) index provided an offset to the growth data, as it contracted by 0.5% m/m, below the median forecast for a 0.3% m/m decline. We retain a bearish view of USD-JPY as we expect the Sino-U.S. trade war to continue to escalate, which in turn should raise the Yen's safe haven premium. China's principal newspaper, which is a conduit for the official government line, refuted domestic criticism about Beijing's stance in the trade war with the U.S., remarking that "an elephant can't hide." 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]
    Cable dove to a fresh one-year low under 1.2800, this time driven by general Dollar weakness, which comes with this week already being the fifth consecutive week of declines the pair has seen. The Pound has concurrently recouped some lost ground against the Euro, which has been bearing the brunt of the Dollar's gains. Sterling this week posted fresh 10- and 11-month lows versus the Euro and Yen, respectively. Political uncertainty has soured sentiment, lifting the Brexit-risk discount being asked of the UK's currency. Former foreign secretary Boris Johnson looks to be scheming to make a leadership challenge on Prime Minister May, adding to the growing concern that the UK could leave the EU next March without a new agreement on trade or other issues having been agreed on. A no-deal exit would mean trade with the EU would revert to WTO rules, and while hard Brexiteers think this is a workable solution their optimism evidently isn't being matched by currency markets, which see such a scenario as being costly for both the UK and EU. Cable has trend support at 1.2745.

    [USD, CHF]
    EUR-CHF has been pulled lower by EUR-USD, with the cross now down for a third consecutive day, logging a 10-week low at 1.1402. The May low at 1.1368 provides a downside waypoint, marking the base of a broadly sideways range that's been unfolding since August 2017. The low today is the new nadir of a retreat from the two-month high that was posted in mid July at 1.1714.

    [USD, CAD]
    USD-CAD has lifted for a second day amid broad rally in the U.S. buck, but also following a sharp retreat in oil prices, which provides a bearish lead for the Canadian Dollar. Support comes in at 1.3008-10, and resistance at 1.3100-05. Canada releases the July employment report today, we expect a 15.0k headline gain (median 20k) following the 31.8k gain in June. The unemployment rate is seen slipping to 5.9% after perking up to 6.0% in June from the 40-year low 5.8% in May. Total average hourly earnings are seen rising at a 3.7% y/y rate in July from the 3.6% clip in June, but still short of the 3.9% growth rate of May.

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