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By XE Market Analysis August 23, 2019 4:07 am
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    XE Market Analysis: Europe - Aug 23, 2019

    The New Zealand Dollar outperformed and China's Yuan weakened, while the U.S. buck traded modestly firmer against most currencies as market participants anticipate Fed Chair Powell's address at the Jackson Hole Symposium later today. Regarding Powell, market participants are evidently not overly hopeful he will signal a clear and strong commitment to sustained rate cuts following hawkish-leaving remarks by Fed members George and Harker yesterday, and the not-so-dovish FOMC minutes from the day before. The narrow trade-weighted USD index (DXY) rose 0.2%, to 98.35, which is near the recent three-week high at 98.45, while EUR-USD printed a three-week low at 1.1160. USD-JPY nudged higher and matched the five-day high seen on Wednesday at 106.65. Japanese CPI held at a two-year low of 0.5% y/y in July, as expected, remaining well off the BoJ's 2.0% target. As for the Kiwi Dollar, the currency popped higher at the prompt of RBNZ-speak, with Governor Orr saying that quantitative easing is "far from our central scenario," while arguing that the recent 50 bp cut reduces the chances of having to do more farther down the road. NZD-USD rallied to the upper 0.6300s, extending a rebound from the fresh 10-year low that was seen yesterday at 0.6361. The Yuan hit a low of 7.0992 against the Dollar, the weakest since March 2008, while the PBoC set the reference rate at 7.0572, also the lowest since 2008 although firmer than markets had been anticipating.

    [EUR, USD]
    EUR-USD printed a three-week low at 1.1160. A combo of Dollar firmness, inspired by hawkish-leaning remarks from Fed members George and Harker yesterday, and the not-so-dovish FOMC minutes from the day before, and euro weakness have been at play. EUR-USD yesterday more than reversed gains seen following above-expectations Eurozone PMI headlines. While the Eurozone's preliminary manufacturing PMI rose to 47.0 from 46.5, and the services reading to 53.4 from 53.2, the data still points to ongoing contraction in the manufacturing sector, which continues to face ongoing pressure on manufacturing exports from three fronts -- secondary effects from the U.S-China trade war, lingering direct conflict with the U.S. over trade, and the risk of a no-deal Brexit. Some market narrative have also highlighted that Germany's services PMI hit a seven-month low, suggesting that weakness in manufacturing is starting to affect other areas of the economy, in addition to low expectations readings. We continued to take a bearish view of EUR-USD, seeing that the ECB remains on a course to easing in September and given the risk of a no-deal Brexit, which in the event would be detrimental to the Eurozone economy. The political situation in Italy is also on the worry list.

    [USD, JPY]
    USD-JPY nudged higher and matched the five-day high seen on Wednesday at 106.65. Japanese CPI held at a two-year low of 0.5% y/y in July, as expected, remaining well off the BoJ's 2.0% target. This and the backdrop of comparatively steady stock markets has seen the Yen weaken moderately.

    [GBP, USD]
    Sterling yesterday posted its biggest single day rally since March 13 against the dollar, rising by over 1%. Cable's high is 1.2273, which is the loftiest level seen since late July. The gains were sparked by comments made by German's Merkel, who (to paraphrase) said that a solution to the Irish border backstop conundrum is doable by the October-31 Brexit deadline. UK Prime Minister Boris Johnson followed this up by saying at his joint press conference with France's Macron that he was encouraged by his talks in Berlin yesterday, and that a deal, he thinks, can be done ahead of October 31. Macron, said, however, that while he has always respected the UK's decision to leave the EU, the European project has to be protected, to which the Irish backstop remains an important part of ensuring this. Merkel's remarks are little more than rhetorical platitudes at this stage, though were evidently enough to trigger a short squeeze in a heavily shorted currency. EU officials will be watching closely how the pending battle between the no-to-no-deal and the pro-no-deal-Brexit parliamentary factions plays out. Earlier in the day the pound had been bid following news that UK opposition leader, Corbyn, has invited to leaders of other opposition parties to discuss tactics to stop a no-deal Brexit.

    [USD, CHF]
    EUR-CHF has lifted to 10-day highs above 1.0900, putting in a little space from the recent 25-month at 1.0835. While risk conditions have improved since last week, which has seen the Franc's safe-haven premium unwind, 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 nudged to a three-day high 1.3326, returning focus on the recent two-month high at 1.3345. This comes with market participants anticipatinng Fed Chair Powell's address at the Jackson Hole Symposium later today, evidently not being overly hopeful he will signal a clear and strong commitment to sustained rate cuts following hawkish-leaving remarks by Fed members George and Harker yesterday, and the not-so-dovish FOMC minutes from the day before. This has given the U.S. currency buoyancy. USD-CAD support comes in at 1.3270-73.

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