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By XE Market Analysis August 16, 2018 3:03 am
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    XE Market Analysis: Europe - Aug 16, 2018

    Both the Dollar and Yen have weakened today, giving back recent gains amid an improvement in risk appetite. The U.S. and China have agreed on a new round of trade talks, while Turkey has managed to halt the rout of the Lira and secure major investments from Qatar and China's Alibaba. The USD index (DXY) is showing a 0.3% decline, at 96.44, heading into the London interbank open, while EUR-USD is concurrently showing a 0.3% gain, earlier printing a two-session high of 1.1397, putting in some space from yesterday's 13-month low at 1.1316. USD-JPY has settled in the upper 110.0s after printing a low in Tokyo at 110.46. AUD-JPY, which can be viewed as a forex market proxy on risk appetite in global markets, is showing the biggest move with just over a 0.5% gain. Over the near-term the Dollar and Yen will likely remain apt to weaken before settling as developments on the latest phase of Sino-U.S. negotiations are awaited.

    [EUR, USD]
    EUR-USD printed a two-session high of 1.1397, putting in some space from yesterday's 13-month low at 1.1316 as the Dollar came under pressure amid a recovery in risk appetite on news that U.S. and China have agreed on a new round of trade talks, while Turkey has managed to halt the rout of the Lira and secure major investments from Qatar and China's Alibaba. Over the near-term the Dollar, and the Yen, will likely remain apt to weaken before settling as developments on the latest phase of Sino-U.S. negotiations are awaited. We advise market participants to remain at their weather stations. 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 (despite the recent turmoil in global markets we still expect two more 25 bp hikes in the Fed funds rate this year, one in September and another in December). EUR-USD has resistance at 1.1425.

    [USD, JPY]
    USD-JPY has settled in the upper 110.0s after printing a low in Tokyo at 110.46. A lift-out-of-lows action in Asian stock markets on news that the U.S. and China will hold a fresh round of trade talks helped the Yen weaken, particularly against the Euro and Australian Dollar. Overall for USD-JPY, we still place greater odds for there being a downside breakout that a sustained rally as we still expect the Sino-U.S. trade war to continue to escalate. The Trump administration is mulling a tariff hike on $200 bln of Chinese imports, which may be confirmed later this month or early next. Trump perceives the advantage in the trade war to be his given the 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, Beijing is not likely to yield, and is looking to be playing the long game, waiting to see how the chips fall for Trump at the November midterms. USD-JPY has support at 110.28-30.

    [GBP, USD]
    Cable has recovered above 1.2700, above the 14-month low seen yesterday at 1.2661. The pair has now fallen in nine of the last eleven sessions in what is the sixth consecutive week of declines, rendering market participants unwilling to sit on long positions for fear of being sliced by the falling knife. GBP-JPY has also declined to new one-year lows, while the Pound has been relatively steady against the Euro, trading above the 11-month low seen against the common currency last week. UK foreign secretary Jeremy Hunt became the latest senior government member to express concern that a Brexit deal with the EU may not be reached, while there is a palpable chance that there will be a leadership challenge on Prime Minister May in the coming weeks. Markets have also been factoring in a degree of exposure that UK banks have to Turkey. UK July CPI came in rose to 2.5% y/y from 2.4% y/y in the headline reading, but the core CPI reading remained unchanged from June, at 1.9%, which is the lowest rate since March 2017. Along with a dip in output PPI, the core CPI suggests that domestically-generated inflationary pressures, something that the BoE is playing close attention to, remain contained. We expect the pound to remain heavy, with a bias to making new lows due to political and associated Brexit-related uncertainty. Cable has initial resistance at 1.2735.

    [USD, CHF]
    EUR-CHF has settled around the 1.1300 level after making a one-year low at 1.1243 yesterday, which was the culmination of five straight sessions of declines. The stabilization of the Turkish Lira has afforded opportunity for the Euro to recover a footing (given the exposure of European banks to Turkey) though market participants remain on edge with Turkey's Erdogan escalating the standoff with the U.S. by announcing tariffs on some U.S. imports. EUR-CHF has resistance at 1.1368-70, which encompasses the May low, which had been the base of a broadly sideways range that had been in play since August 2017.

    [USD, CAD]
    USD-CAD has settled to a consolidation centred on 1.3100. The sharp drop in oil prices over the last couple of weeks should limit downside potential of the pairing, while the relatively strong fundamentals of the U.S. economy (we expect two more Fed hikes this year versus on only one more for the BoC). Any sure signs of progress on the NAFTA front would likely spark a rebound in the Canadian Dollar, as the uncertainty about the re-negotiation has seen a discount built into the currency. USD-CAD has support at 1.3050 and resistance at 1.3170.

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