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By XE Market Analysis August 30, 2017 3:27 am
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    XE Market Analysis: Europe - Aug 30, 2017

    The dollar is trading firmer against most of its main peers, while the yen has underperformed. USD-JPY has led the way, with the pair having recouped above 110.00 from yesterday's low at 108.26. Yen crosses are also higher, with EUR-JPY rallying to a 19-month high today, for instance. Trump's measured response to North Korea's launch of a missile over Japan (he refrained from "fire and fury" bombast and instead said that "all options are on the table") helped allay heightened fears that Pyongyang's latest antics sparked, which led to some pivoting out of safe haven assets and currencies. A stronger than expected reading in U.S. consumer confidence yesterday also gave the dollar a lift, although the data is a pre-Harvey snapshot. EUR-USD has ebbed to a two-session low at 1.1944, well off the 32-month high seen yesterday at 1.2070. The narrow trade-weighted USD index has lifted to 92.45, up from yesterday's low at 91.55. AUD-USD is the main exception to the firmer U.S. dollar theme, with the Aussie outperforming today following stronger than expected building approvals and construction data, while copper prices, a key export of Australia, hit a near three-year high today. AUD-USD logged a four-week high at 0.7995.

    [EUR, USD]
    EUR-USD has ebbed to a two-session low at 1.1944, well off the 32-month high seen yesterday at 1.2070. The move was largely driven by a broader rebound in the dollar. The narrow trade-weighted USD index lifted to 92.45, up from yesterday's low at 91.55. A stronger than expected reading in U.S. consumer confidence yesterday aided the dollar, though the data is a pre-Harvey snapshot and market participants will be trying to assess the economic damage of the storm. The peak at 1.2070 is the culmination of a rally phase that's been in play since January, and more especially since April. Over this period the Eurozone recovery story has continued to develop, while Fed tightening expectations were repeatedly reigned in. We continue to advocate trend following, but also advise caution as recent choppy price action suggest that the trend may be starting to run out of puff.

    [USD, JPY]
    USD-JPY rebounded to the upper 109.0s from yesterday's low at 108.26. Trump's measured response to North Korea's launch of a missile over Japan (he refrained from "fire and fury" bombast and instead said that "all options are on the table") helped allay heightened fears that Pyongyang's latest antics sparked, which led to some positioning out of safe haven assets and currencies, and a rebound in Asian equity markets today. A stronger than expected reading in U.S. consumer confidence yesterday also gave the dollar a lift. USD-JPY's high is 109.91, which is the best level seen since August 17. Above-forecast Japanese retail sales data today had little impact, though the report, following data yesterday showing a drop in the unemployment rate to 2.8% and a rise in job availability, portends for scope for long-awaited reflation. For now, we favour the upside in USD-JPY, assuming there are no fresh spikes in geopolitical tensions. Initial support is at 109.47-48.

    [GBP, USD]
    Sterling has been seeing starkly contrasting fortunes, yesterday clocking a two-week high versus the dollar at 1.2978 but falling further into eight-year low terrain against the euro. These moves have been reversed somewhat today. We retain a bearish view of sterling. The relative stagnation of the UK economy has been in full evidence over the last week, the latest been an unexpected negative print in the August house price index from Nationwide, while European Commission head, Junker sharply criticized the UK government, saying that he had read "with the requisite attention" all the papers produced by the British government before stating that, "none of those is satisfactory."

    [USD, CHF]
    EUR-CHF has seen some chop over the last several sessions, but an overall upside bias remains in place. A high was logged yesterday at 1.1453. In the bigger picture, we remain bullish of EUR-CHF. Assuming the Eurozone economic revival remains on track, which would help quell policymaker angst about euro gains, and assuming the ECB commits to QE policy tapering (which we think will in Autumn), we expect the EUR-CHF to eventually recover to the SNB's former floor level at 1.2000.

    [USD, CAD]
    USD-CAD rebounded after logging a four-week low at 1.2440 yesterday. We continue to favour the downside, anticipating relative outperformance of the Canadian economy, which we expect to come in at 3.7% q/q (saar) in Q2 and 3.0% for the year. This comes with the drag from historic low oil prices in recent years having now passed. We expect the BoC to make a second 25 basis point rate hike in October, which would take the policy rate to 1.00%, and we see two more 25 basis point rate increases next year.

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