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By XE Market Analysis December 22, 2017 3:40 am
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    XE Market Analysis: Europe - Dec 22, 2017

    Currencies are likely to remain range bound as market participants will be non-committal into the holiday period. The yen, while steady today, has been finishing the year on a softening tack. 'Abenomic' policies remain in full swing, with the cabinet today approving a stimulus budget, and with the BoJ having signalled yesterday that it is in no rush to exit from crisis-mode monetary stimulus. USD-JPY has settled around the 113.25-25 mark after yesterday clocking a 10-day high of 110.63. EUR-JPY is trading 26-month high territory, and AUD-JPY in seven-week high terrain. Elsewhere, EUR-USD dipped to a two-day low of 1.1817 in the early Asia session today before lifting to around 1.1850. The euro has been the year's star performer out of the main currencies, registering a 12.8% year-to-date gain versus the dollar, which is the weakest. The abatement of existential political threats along with gathering economic growth momentum have underpinned the common currency this year. Sterling has traded mixed this year, gaining on the dollar while losing ground to the euro, but we expect it will maintain the 15% trade-weighted discount that's been roughly persisting since the Brexit vote in June 2016 into 2018.

    [EUR, USD]
    EUR-USD dipped to a two-day low of 1.1817 in the early Asia session today before lifting to around 1.1850. The euro has been the year's star performer out of the main currencies, registering a 12.8% year-to-date gain versus the dollar, which is the weakest. The abatement of existential political threats along with gathering economic growth momentum have underpinned the common currency this year. We anticipate overall directional bias to shift downwardly in early 2018, however, assuming the temporary financing bill is passed by the U.S. Senate to avoid a government shutdown. The passage of the $1.5 tln tax bill, which will be largely deficit financed and will slash the corporate tax rate, among other things, is generally seen as a positive for the dollar, heralding a loosening in fiscal policy with the implication of monetary policy being tighter than would have otherwise have been the case. EUR-USD has support at 1.1809-10, and resistance at 1.1900-01.

    [USD, JPY]
    The yen is finishing the year on a softening tack, with a loss of around 0.7% versus the dollar and declines of over 1.5% in the cases against the euro and Australian dollar. The BoJ left monetary policy unchanged at its meeting this week, signalling that it is in no rush to exit from crisis-mode stimulus policies despite maintaining an upbeat view on the economy. Governor Kuroda emphasized during his press conference that the central bank will remain committed to dovish policy settings even if the government declares that the threat of deflation has ended. USD-JPY clocked a 10-day high of 110.63 on Thursday before settling around the 113.25-35 mark. EUR-JPY as rallied into 26-month high territory, breaching stop buy orders and triggering option barriers following the break above 113.50 earlier in the week. AUD-JPY has traded in seven-week high terrain. Technically, USD-JPY is amid a broadly sideways chop, roughly centred between 108.0 to 115.00, which has been persisting for eight months now. An upward trending phase is afoot now, and we are anticipating the dollar to rally in early 2018 as markets digest looser fiscal policy in the U.S.

    [GBP, USD]
    Sterling has traded mixed this year, gaining on the dollar while losing ground to the euro, but we expect it will maintain the 15% trade-weighted discount that's been roughly persisting since the Brexit vote in June 2016 into 2018. The Brexit negotiation process will continue to dominate the UK's agenda next year. The weak political position of the prime minister and her minority government will continue to be a font of uncertainty for investors and business leaders. Given our bullish dollar view, we see the risks for Cable are skewed to the downside. Resistance is at 1.3394-96, and support is at 1.3310.

    [USD, CHF]
    EUR-CHF rallied to levels last seen in January, 2015, when the SNB pulled its support from the pairing. We remain bullish over the medium term. Assuming the Eurozone has conquered existential political threats, and assuming the SNB remains anchored to ultra-accommodative monetary policy, which looks likely to be the case for the foreseeable future (the central bank reaffirmed this commitment at its quarterly policy review last week), we anticipate EUR-CHF will make a return to 1.2000.

    [USD, CAD]
    USD-CAD corrected to a 1.2699 low before settling in the lower 1.27s. The decline extended from the 1.2920 high that was seen earlier in the week. The pair has failed to hold gains above 1.2900 on multiple occasions since early October. How the U.S. dollar benefits from the expected tax overhaul, how oil prices evolve, how NAFTA re-negotiations go, and how the BoC proceeds with its slow-go tightening cycle will be dominant themes for USD-CAD heading into 2018. Over the holiday period we anticipate USD-CAD to hold in a rough 1.2700 to 1.2900 consolidation range.

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