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By XE Market Analysis February 4, 2019 3:41 am
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    XE Market Analysis: Europe - Feb 04, 2019

    Moderate Yen underperformance has remained a theme in markets so far today, as it had been on Friday. This floated USD-JPY to a 10-day high at 109.82, while EUR-JPY and AUD-JPY have traded near five- and seven-week highs, respectively. The Japanese currency has been underperforming relative to the other main currencies in the wake of the strong U.S. jobs report on Friday, and slew of other mostly positive U.S. data (ISM, construction, Michigan, wholesale), which lifted of animal spirits in equity markets, although Lunar New Year holidays disrupted trading significantly today (China will be closed all week, and South Korean through to Thursday). The perky data followed the dovish shift in the Fed, which is tonic for equity markets, although many, including ourselves, are thinking that the Fed may have prematurely shifted to a neutral policy footing. EUR-USD has drifted moderately lower on the back of modest Dollar outperformance. The pair's low so far is 1.1439, which is 5 pips shy of Friday's low. Sterling has been in consolidation mode with a clear picture in the UK so far failing to emerge from the ongoing, intense political machinations. Parliament will vote on the Prime Minister May's Withdrawal Agreement next Wednesday (February 13). The government and members of parliament who collectively form the new Alternative Arrangements Working Group will convene today through to Wednesday to brainstorm alternative solutions to the Irish backstop, the ideas from which May will return to Brussels with, though EU officials have continued to pre-emptively reject this as a viable way forward.

    [EUR, USD]
    EUR-USD has drifted moderately lower on the back of modest Dollar outperformance, which has been seen since the release of strong U.S. data on Friday (employment, ISM, construction, among other items). The pair drifted under 1.1400, coming within a few pips of Friday's low at 1.1434. The pair has corrected from last week's three-week high at 1.1514, which was seen in the wake of the Fed's hawkish-to-neutral shift last Wednesday. We expected EUR-USD to see further downside. Resistance at 1.1470-72, and support at 1.1420.

    [USD, JPY]
    USD-JPY printed a 10-day high at 109.82, while EUR-JPY and AUD-JPY are trading near five- and seven-week highs, respectively. The Yen has been underperforming relative to the other main currencies in the wake of the strong U.S. jobs report on Friday, and slew of other mostly positive data (ISM, construction, Michigan, wholesale), and consequential lifting of animal spirits in equity markets. The Japanese currency's proxy role as a safe haven often sees the yen correlate inversely with global stock market direction. USD-JPY's January highs at 110.00-02 provide an upside waypoint for the bullish. Support comes in at 108.80-82.

    [GBP, USD]
    Sterling has been in consolidation mode with a clear picture in the UK so far failing to emerge from the ongoing, intense political machinations. Parliament will vote on the Prime Minister May's Withdrawal Agreement next Wednesday (February 13). The government and members of parliament who collectively form the Alternative Arrangements Working Group will convene today through to Wednesday to brainstorm an alternative solution to the Irish backstop, the ideas from which May will return to Brussels with. The EU has continued to pre-emptively reject it. The Irish PM said it was "very frustrating" that the UK government was "going back to the idea of technology." If the EU, as looks likely, rejects whatever May has, then the Withdrawal Agreement will remain unmodified and presumably destined to be voted down next week. The prime minister and her allies have been utilizing the threat of a chaotic no-deal exit for negotiating leverage, but it's reasonable to think that she -- who voted for the UK to remain in the EU at the referendum in 2016 -- and the vast majority of members of parliament will ultimately ensure a no-deal scenario doesn't become a reality. We estimate that the UK's currency is trading at a near 13% discount in trade-weighted terms since the vote to leave the EU in June 2016, recovering from about a 15% discount at December lows.

    [USD, CHF]
    EUR-CHF has settled near the 1.1400 level, holding below last week's 11-week high at 1.1429. The cross has been going through phase of relatively high volatility, which has produced several bouts of pronounced underperformance in the Swiss franc, which have often been accompanied by talk/suspicions of SNB intervention. SNB Chairman Jordan said recently that "current monetary policy is the right one and we will continue to with it for some time." He said that for 2019 the biggest concerns are "political mistakes," pointing to the U.S.-China trade war and "Brexit and the European situation." Jordan also expressed concern about further safe-haven driven franc appreciation, "especially" in a no-deal Brexit scenario. SNB vice president, Zurbruegg, also said last month that the franc "remains highly valued" and the situation on foreign currency markets is "still fragile" and that the SNB's two pillar strategy of negative interest rates and ad-hoc currency interventions, or threat thereof, "remains appropriate."

    [USD, CAD]
    USD-CAD has remained downwardly mobile, with the Canadian Dollar benefitting from recent strong gains in oil prices. The pair printed a three-month low at 1.3068 on Friday, with subsequent rebounds having stalled out above 1.3100. This comes with oil prices having rallied by nearly 7% over the last week, extending the year-to-date advance to over 22%. This is a boon to Canada's terms of trade. USD-CAD has resistance at 1.3110, and support at 1.3065-67.

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