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By XE Market Analysis August 28, 2019 4:15 am
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    XE Market Analysis: Europe - Aug 28, 2019

    The Dollar has continued to trade directionally mixed amid a backdrop of misfiring stock markets as participants digest recent mixed signals from the U.S.-China trade front. The narrow trade-weighted USD index (DXY) has settled in a narrow range above 98.00, having recouped about three quarters of the losses seen on Friday, when China announced retaliatory tariffs on U.S. goods. The Yen has seen its safe premium rise from week-ago levels, with the currency showing a 0.7%-0-8% gain versus the Dollar and Euro, and a 1.4% advance on the Australian Dollar, which has underperformed by virtue of its status as being a currency proxy on China. Bloomberg report that after a weekend of confusing signals that only a few negotiators in Beijing expect a deal with the U.S. will be possible ahead of the 2020 election in the U.S. election, partly because there are concerns that any deal signed now may eventually be broken by Trump. The president's claim that top officials from China had called U.S. negotiators has increased the distrust in China, where few appeared to know what he was talking about. On the other hand it's seems clear that Trump's proclivity to double down repeatedly may be "trumped" by his concerns about the state of the economy heading into next year's election (latest polls from key battleground states should be alarming to Trump), which gives Beijing a strong negotiating position. At some point, China may throw Trump a bone so he could claim a victory, and possibly reverse at least some of the tariffs to give markets a boost into the November 2020 election, though it's probably too early for that to happen just now.

    [EUR, USD]
    EUR-USD printed a four-session low at 1.1084 in what is now a third consecutive day of decline. A sub-forecast reading in the German July Ifo index and German Q2 GDP, which showed a 0.1% q/q contraction, have upped the ECB stimulus ante heading into the central bank's September policy meeting, which has undermined the Euro. The risk of a no-deal Brexit, which in the event would be detrimental to the Eurozone economy, and political instability in Italy, are also on the worry list with regard to the common currency. As for the Dollar, the abatement in risk aversion this week, has been a boon, taking some of the pressure off the Fed. EUR-USD has support at 1.1079-80, and resistance at 1.1147-50.

    [USD, JPY]
    The Yen has seen its safe premium rise from week-ago levels, with the currency showing a 0.7%-0-8% gain versus the Dollar and Euro, and a 1.4% advance on the Australian Dollar (at levels prevailing just ahead of the London interbank opening today). The latter has underperformed by virtue of its status as being a currency proxy on China. Bloomberg reported that after a weekend of confusing signals that only a few negotiators in Beijing expect a deal with the U.S. will be possible ahead of the 2020 election in the U.S. election, partly because there are concerns that any deal signed now may eventually be broken by Trump. The president's claim that top officials from China had called U.S. negotiators has increased the distrust in China, where few appeared to know what he was talking about. On the other hand it's seems clear that Trump's proclivity to double down repeatedly may be "trumped" by his concerns about the state of the economy heading into next year's election (latest polls from key battleground states should be alarming to Trump), which gives Beijing a strong negotiating position. At some point, China may throw Trump a bone so he could claim a victory, and possibly reverse at least some of the tariffs to give markets a boost into the November 2020 election, though it's probably too early for that to happen just now.

    [GBP, USD]
    Cable rotated higher yesterday and carved out a one-month high at 1.2310 before settling to a narrow range in the upper 1.2200s. The pound had also advanced against the Euro and other currencies, which came after UK opposition parties released a joint statement -- essentially a battle cry ahead of parliament's reopening after the summer recess next Tuesday -- pledging their agreement to find "practical ways" to take the no-deal Brexit option off the table. This was a reminder that a no-deal Brexit is by no means a certainty, although the possibility of it has, of course, increased by arrival of Boris Johnson at the prime ministerial helm. Aside from strategising on ways to stop the prime minister proroguing (temporarily shutting down) parliament, much of the opposition's focus now centres on preventing no-deal by legislation. There is a reasonable chance that this could succeed, but it's by no means certain. If a no-deal Brexit is legislated against, this would likely lead to the Brexit deadline being extended. This would in turn put Prime Minister Johnson, having promised to deliver Brexit on October 31 "no ifs or buts," in a difficult position, from which he would almost certainly call a general election (having already been buoyed by some favourable polling). Should the opposition fail on the legislative front, they would turn to a confidence motion option as a last resort. If this succeeded in taking down the government, it would put the UK on track to a general election with a delayed Brexit deadline. Should Boris Johnston survive all of this, his negotiating position would be bolstered, though it would still be far from certain that the EU would give way on the Irish backstop issue, as they see the removal of it as breaching the Good Friday Peace Agreement -- which is why a no-deal Brexit has to be taken as a serious risk.

    [USD, CHF]
    EUR-CHF has been in sideways, sometimes choppy range for two weeks now, holding above the 25-month low seen on August 15. The low was a product of increased expectations for ECB monetary stimulus, and partly an increased safe haven premium being placed on the Swiss currency, despite the punishing -0.75% deposit rate. We expect the cross to remain heavy. While sentiment in global markets has improved this week, there remains a thread of skittishness. The the risk of a disorderly no-deal Brexit on October 31 is also a negative for the Euro.

    [USD, CAD]
    USD-CAD edged out a two-day high at 1.3310, extending a rebound from the two-week low seen yesterday at 1.3225. The pairing has been lacking clear direction over the last three weeks, which follows a rally phase out of the 10-month low seen in mid July at 1.3109. The evolution of the Trumpian trade war and its impact on the global economy will continue to have potentially directional impact on USD-CAD given the Canadian Dollar's standing as a commodity currency. USD-CAD has support at 1.3270-73.

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