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By XE Market Analysis August 15, 2019 3:55 am
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    XE Market Analysis: Europe - Aug 15, 2019

    The Aussie Dollar rallied on Australian employment data, which expanded by 41k, well up on the median forecast for a 14k rise and with full-time positions making up a solid 34.5k of the total. Despite a 2.8% closing loss in the local ASX equity index, which markedly underperformed other Asian indexes, the data catalyzed a short-covering reaction in the forex market, lifting the recently heavily shorted AUD-USD pairing and AUD-JPY cross. The former rose by just over 30 pips in making an intraday high at 0.6788 before losing steam, leaving yesterday's peak at 0.6797 untested. Ditto for AUD-JPY in terms of price action, and the pairing and cross are still showing respective 3.3% and 5.3% declines from month-ago levels, reflecting the impact that trade warring, geopolitical concerns and the looming threat of recession have been having on the China-exposed Australian Dollar. Elsewhere, the other main Dollar pairings and cross rates have been plying narrow ranges so far today, with EUR-USD, for instance, holding steady near. Currency market participants have turned non-committal again, and while Chinese equity markets have managed to limp back into the black, investor sentiment remains distinctly restive. The decline in safe government bond yields has the effect of increasing equity risk premiums, though this is offset by the increased recession risk in major economies such as the the U.S. and Europe. An inversion of the U.S. yield curve, which appeared yesterday for the first time since 2007, has portended each recession the U.S. economy has seen since 1955.

    [EUR, USD]
    EUR-USD has over the last day broken out of week-long orbit of the 1.1200 level, settling lower, around 1.1150 after pegging a low at 1.1130, which is a 10-day low. President Trump Trump's partial de-escalation of his trade war with China catalysed some Dollar buying on the view that it would take the pressure off the Fed. We take a bearish view of EUR-USD given the ECB's course to easing in September and the risk of a no-deal Brexit, which in the event would be detrimental to the Eurozone economy.

    [USD, JPY]
    USD-JPY whipped higher in the early London session after flatlining for much of the Tokyo session. Price action was choppy, with the pair hitting a peak at 106.78 after rallying from sub-106.0 levels, before settling back around 106.30. The rally coincided with a sharp rally in S&P 500 futures, which were showing a 0.7% gain, and followed a spike in AUD-JPY following an unexpectedly solid employment report out of Australia. The USD-JPY high seen on Tuesday at the prompt of President Trump's tariff-delay announcement, at 106.97, has been left unchallenged so far. This is classic price action for this pairing amid phases of flip-flopping risk-off and risk-back-on sentiment shifts. Helping the latest recouperation in broader investor spirits has been Chinese equity markets, which managed to limp back into the black during the late afternoon session. The decline in safe government bond yields has the effect of increasing equity risk premiums, which some equity analysts have been highlighting as a reason behind recent dip-buying, though this is balanced by the increased recession risk in major economies such as the the U.S. and Europe. An inversion of the U.S. yield curve, which appeared yesterday for the first time since 2007, has portended each recession the U.S. economy has seen since 1955.

    [GBP, USD]
    The Pound has been traded steadily so far this week. The currency took a knock yesterday after the UK yield curve inverted, in sympathy with the inversion seen on the U.S. curve, though there was little follow-through, suggesting that markets have found an equilibrium with regard to a Brexit-risk discount. The Gilt 2-/10-year yield differential went negative yesterday for the first time since the global financial crisis of 2008. This follows preliminary UK Q2 GDP data, released last Friday, unexpectedly showing a negative reading, of -0.2% q/q, and comes with markets bracing for the risk of a disorderly no-deal Brexit (which was given a median 35% probability of happening in the latest Reuters poll, up from 30% previously). The UK currency has reversed gains that were seen after warmer than expected UK CPI data and on news that the speaker of the House of Commons, John Bercow, stated that he will fight to stop PM Boris Johnson from shutting (aka proroguing) parliament as a means to force through a no-deal Brexit. Cable has settled back in around 1.2050-70. The 31-month low seen on Monday is at 1.2015. Regarding Brexit, the scene is set for final showdown between anti-no-deal members of parliament and the pro-no-deal Brexiteers, which include Prime Minister Boris Johnson and his cabinet (who lead a weak minority government with a working majority of just one, and with a portion of their own Tory members disposed to stopping a no-deal eventuality, but who will be galvanized by some favourable polling). The battle will commence on September 3, when parliament reopens after the summer recess.

    [USD, CHF]
    EUR-CHF edged out a fresh 25-mont low at 1.0838 yesterday amid a renewed turn lower in equity markets and recession-portending inversions of the U.S. and UK yield curves, which fed safe haven demand for the Swiss currency (despite the punishing -0.75% deposit rate). We retain a bearish view of the cross given ECB's course to additional monetary stimulus in September, and the risk of a disorderly no-deal Brexit on October 31.

    [USD, CAD]
    USD-CAD printed an eight-day high at 1.3325 yesterday, which came amid a near 4% decline in oil prices. USD-CAD support comes in at 1.3207-10.

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