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By XE Market Analysis August 16, 2019 3:56 am
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    XE Market Analysis: Europe - Aug 16, 2019

    Narrow ranges have been prevailing amid a restive mood in global markets. Hopes for more central bank stimulus have been winning out in equity markets, for now, though this is juxtaposed by fears that a number of major economies are simultaneously heading for recession, with a number of developing-world economies with high dollar debt levels are particularly exposed to the shifting financial cycle. Given these fears, further conciliatory remarks are likely from both China and the U.S. with regard to their trade spat, which may help maintain investor spirits. The concern will remain, however, that the course to recession may be becoming self fulfilling, given record debt levels and the impact that flattening yield curves on bank lending levels. In the mix of news today is North Korea, which test-fired more missiles today while dismissing South Korea calls for talks, while tensions in Hong Kong remain a potentially destabilizing issue for Asia. Among the main currencies, EUR-USD has settled near the 1.1100 level, consolidating losses seen yesterday following firmer than expected U.S. retail sales and productivity data, which tipped the balance of Fed versus ECB easing expectations a little. USD-JPY has settled around the 106.00 mark, which is roughly the midway point of the choppy range that's been seen over the last couple of days. The pound has continued to hold up, and is set to post its first up week against the dollar after four consecutive down weeks and its first up week versus the euro out of the last 15 weeks, suggesting an equilibrium of sorts has been reached following a prolonged phase of underperformance.

    [EUR, USD]
    EUR-USD has settled near the 1.1100 level, consolidating losses seen yesterday following firmer than expected U.S. retail sales and productivity data, which tipped the balance of Fed versus ECB easing expectations a little. We have been advocating a bearish view of the pairing 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. And while any return of risk-off trading in global markets may initially elicit Dollar selling should it imply a more aggressive Fed easing path, such a backdrop may also increase demand for U.S. Treasuries, being the biggest and most liquid market for risk-free assets in the world, which in turn may buoy the greenback.

    [USD, JPY]
    USD-JPY has settled around the 106.00 mark, which is roughly the midway point of the choppy range that's been seen over the last couple of days. The pairing, and Yen crosses (AUD-JPY in particular) will be prone to volatility should there be continued flip-flopping between risk-off and risk-back-on sentiment, which seems likely as hopes for more central bank stimulus vies with fears that a number of major economies are simultaneously heading for recession, with a number of developing-world economies with high dollar debt levels are particularly exposed to the shifting financial cycle. Given these fears, further conciliatory remarks are likely from both China and the U.S. with regard to their trade spat, which may help maintain investor spirits. The concern will remain, however, that the course to recession may be becoming self fulfilling, given record debt levels and the impact that flattening yield curves on bank lending levels. In the mix of news today is North Korea, which test-fired more missiles today while dismissing South Korea calls for talks, while tensions in Hong Kong remain a potentially destabilizing issue for Asia. Overall, we take a bearish view of USD-JPY, anticipating increasing safe-haven premium for the Japanese currency.

    [GBP, USD]
    The Pound has continued to hold up, and is set to post its first up week against the dollar after four consecutive down weeks and its first up week versus the euro out of the last 15 weeks, suggesting an equilibrium of sorts has been reached following a prolonged phase of underperformance. On the Brexit front, 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. The risk of a disorderly no-deal Brexit was given a median 35% probability of happening in the latest Reuters poll, up from 30% previously.

    [USD, CHF]
    EUR-CHF edged out a fresh 25-mont low at 1.0835 yesterday amid volatility 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 nine-day high at 1.3339 yesterday, which came amid sharp oil price declines and after above-forecast U.S. retail sales and productivity data. USD-CAD support comes in at 1.3207-10.

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