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By XE Market Analysis August 20, 2018 3:08 am
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    XE Market Analysis: Europe - Aug 20, 2018

    The Dollar majors have been showing little net directional change in thin, early-week trading. The biggest movement heading into the London interbank open are AUD-USD and NZD-USD, with both showing gains of 0.2%. Stock markets in Asia have been mixed, while EUR-USD and USD-JPY have been treading sideway paths, the former in the low 1.1400s and the latter above 110.50. Market participants are looking ahead to potential market moving events this week. We have the resumption in Sino-U.S. trade talks after a two-month hiatus, which will take place tomorrow and Wednesday, the release of the FOMC minutes from the recent meeting, and the Jackson Hole economic policy symposium, on Friday, which will feature a keynote speech by Fed Chairman Powell and provide ample opportunity for policymakers to expound talking points. There is also optimism, as expressed by Mexican officials last week, that a bilateral agreement on NAFTA could be reached this week. Brexit negotiations, which resumed last Thursday after a summer break, are also on the radar screen, and the spike in Italian yields and the causational political situation in Italy should also be monitored closely. USD-TRY has dropped back below 6.000, driven by a rebound in the Lira after Qatar's and Turkey's central banks signed a currency swap on Sunday which will facilitate liquidity and support from Qatar, though concerns remain about Turkey and other fragile emerging-world economies, caught out by a mixture of tighter U.S. monetary policy, hefty dollar borrowing and poor economic policies.

    [EUR, USD]
    EUR-USD has been making time in the lower 1.1400s. We retain a bearish view of the pairing. The relative strength of the U.S. economy should be showcased by incoming data, and show price pressures to be picking up, 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. In Europe, Italian yields have been spiking as concerns about the Euro-sceptic populist government came back to the fore.

    [USD, JPY]
    USD-JPY has lifted back above 110.50 in thin trade, holding above Friday's one-week low at 110.31. EUR-JPY and other Yen crosses are also trading above their respective Friday lows, with the Japanese currency having seen a layer of its safe-haven premium shaved off amid improved risk appetite ahead of trade talks between the U.S. and China, which will take place in Washington DC tomorrow and Wednesday. Trade negotiations between the two have been in suspension since June, so the recommencement is a relief for investors, although China's Vice-Minister Wang Shouwen and Treasury undersecretary David Malpass, who will lead this week's discussions, are relatively junior officials and there is a general sense of wariness about anything substantial will be achieved given this, and given the gulf in differences between the two sides. A WSJ report on Friday raised spirits by alleging that a summit between president's Trump and Xi is in the works, but the report, which cited unnamed officials, hasn't been confirmed officially. Trump and Xi are already due to meet when they attending the G20 Leaders' Summit on November 20 in Argentina. Another factor in helping meliorate investor anxieties is a rebound in the Turkish Lira, which has driven USD-TRY back below 6.000 today, after Qatar's and Turkey's central banks signed a currency swap on Sunday which will facilitate Qatar to provide liquidity and support, though concerns remain about Turkey and other fragile emerging-world economies, caught out by tighter U.S. monetary policy and hefty dollar borrowing.

    [GBP, USD]
    Cable racked up a sixth consecutive week of declines. Political and associated Brexit-related risks are keeping the pound in a lower trading band than it otherwise would be. Negotiations re-commenced between the UK and the EU last week, and Latvia's foreign minister said on Friday that there was a 50-50 chance for there being a no-deal Brexit, which UK's foreign minister, Hunt, concurred with, remarking that "time is running out." Hunt, who supported the UK remaining in the EU, also said that if the UK left the EU without a new deal in place "it would be a mistake we would regret for generations" (something that is contested by strong supporters of leaving the EU) Cable has trend resistance at 1.2810-12.

    [USD, CHF]
    EUR-CHF has turned moderately lower, to levels around 1.1350, after pegging a 10-day high at 1.1394 on Friday. The cross remains comfortably above the one-year that was seen at 1.1243 last Wednesday. Ankara's success in halting the rout of the lira and news that the U.S. and China are heading back to the negotiating table have given the franc opportunity to come off the boil. SNB Vice Chairman Zurbruegg said last week that the central bank's ultra-accommodative monetary policy (negative interest rates coupled with tactical forex interventions) was justified in light of the franc's surge in the wake of the Turkish economic turmoil and flash of contagion in other emerging nations with high levels of dollar borrowings.

    [USD, CAD]
    USD-CAD has consolidated the steep drop that was seen on Friday following the release of hotter-than-expected CPI data out of Canada. The pair logged a four-session low at 1.3052, and this level and last week's low at 1.3050, now form a key near-term support zone. There remains a built-in discount to the Canadian Dollar, relating to the NAFTA renegotiation, so USD-CAD will remain directionally sensitive to developments on this front. The pair has resistance at 1.3098-1.3100.

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