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By XE Market Analysis February 5, 2019 3:42 am
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    XE Market Analysis: Europe - Feb 05, 2019

    The Australian Dollar rallied after the RBA refrained from aping the Fed's dovish turn following its policy meeting today, where it left the cash rate at the record low 1.50%, as widely anticipated. Elsewhere, the Dollar held mostly firm, edging out a 13-day high versus the Pound and eking out a one-week high versus the Euro, with EUR-USD printing a low at 1.1422. USD-JPY held little more than a 25 pip range, printing an intraday high at 110.04 before ebbing back under 110.0, leaving yesterday's five-week high at 110.16 unchallenged. AUD-USD had been under pressure ahead of the RBA's announcement, making a one-week low at 0.7194, which followed weaker than expected retail sales data out of Australia. But widespread market expectations for a dovish shift -- hinged on the view that the central bank would want to offset the Fed's move given the 3%-odd year-to-date rally the Aussie Dollar vs the U.S. Dollar, and given the weakening housing market -- failed to materialise. The RBA instead clung to the view that its policy targets are being "gradually" achieved, and also sounded upbeat on the "strong" labour market. AUD-USD rallied by over a net 0.5% in making a high of 0.7264. Global equity markets have remained buoyant, though markets in China, Taiwan, South Korea, Singapore and Indonesia have all been closed for the Lunar New Year. Japan's Nikkei hit a seven-week high before closing with a fractional 0.2% loss. Australia's ASX index closed with a 2% gain. The MSCI World Index has scaled to a two-month high having gained 13% from the near two-year nadir that was seen in late December. Oil prices are up over 20% year-to-date.

    [EUR, USD]
    EUR-USD has drifted to the lower 1.1400s, putting in some extra distance from the three-week high seen last week at 1.1514. Recent daily lows in the 1.1390 to 1.1406 range form a support zone. The latest phase of EUR-USD's ebb has been driven by broader Euro declines, with EUR-GBP and other crosses concurrently seeing losses. Brexit uncertainty, and PMI evidence this week that it is having a material impact on economic activity, has been weighing. In EUR-USD's case, this juxtaposes a recent run of strong data (including employment, ISM and construction reports, among other items). We expect EUR-USD to see further downside. Resistance at 1.1430-32, and support at 1.1390-95.

    [USD, JPY]
    USD-JPY has posted a narrow range so far today, holding little more than a 25 pip range, printing an intraday high at 110.04 before ebbing back under 110.0, leaving yesterday's five-week high at 110.16 unchallenged. Global equity markets have remained buoyant, though markets in China, Taiwan, South Korea, Singapore and Indonesia have all been closed for the Lunar New Year. Japan's Nikkei hit a seven-week high before closing with a fractional 0.2% loss. Australia's ASX index closed with a 2% gain. The MSCI World Index has scaled to a two-month high having gained 13% from the near two-year nadir that was seen in late December. Oil prices are up over 20% year-to-date. The risk-on backdrop has seen the Yen trade lower against most other currencies, reflecting an unwinding in the currency's safe haven premium.

    [GBP, USD]
    Sterling has been on a steady-to-lower path in recent sessions, giving back some of the gains seen on the year-to-date. The ongoing implacability of the EU against the UK government's desire to replace the Irish backstop with an "alternative arrangement" had been weighing on Her Majesty's currency. Both the January manufacturing and construction PMI surveys (released last Friday and yesterday, respectively) have painted an ominous picture of Brexit uncertainty directly leading to slowing momentum in the UK economy. This backdrop should keep the pound on an overall downward tack for now, though there is potential for the currency to rally should a no-deal Brexit be concretely rule out (which we expect, although it may not be for some time yet). Cable has support at 1.3043-45.

    [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, often 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 lodged to a consolidation of recent losses in the lower 1.3100s. The pair printed a three-month low at 1.3068 on Friday. The Canadian Dollar has gained nearly 4% versus its U.S. counterpart on the year-to-date, benefitting from recent strong gains in oil prices, with crude prices having rallied over 20% on the year so far. This is a boon to Canada's terms of trade. USD-CAD has resistance at 1.3148-50, and support at 1.3065-67.

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