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By XE Market Analysis February 8, 2019 3:46 am
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    XE Market Analysis: Europe - Feb 08, 2019

    The Dollar majors have mostly held narrow ranges amid a backdrop of coursing in global markets. One exception has been AUD-USD, which dove to a five-week low at 0.7060 after the RBA shaved growth forecasts in its quarterly Statement on Monetary Policy. This follows yesterday's trimming of GDP forecasts by both the European Commission and BoE, for the Eurozone and UK economies, respectively, which have collectively added fuel to the global slowdown narrative. U.S. President Trump also said that he did not plan to meet with Xi before the March 1 deadline set by the U.S. and China to achieve a trade deal. No doubt a ploy to up the ante, with the U.S. having pledged to significantly hike tariffs on Chinese imports on March 2, but markets are skittish as the two sides seem to remain a long way apart on the issue of intellectual property, the issue that next week's talks in Beijing will be attempting to bridge. Despite a bearish course in stock markets in Asia, the safe-haven theme has so far largely been absent in forex markets. The Yen has held steady versus the Dollar and other currencies, although AUD-JPY carved out a four-week low at 77.44. USD-JPY has held a narrow range in the upper 109.0s. EUR-USD has also been plying a narrow range, in the mid 1.1300s. The safe haven theme has been more evident in other markets. German and Japanese debt yields falling to their lowest in over two years, with the 20-year JGB yield falling to a 27-month low. MSCI’s Asia-Pacific index was down 0.5%, and S&P 500 futures off by 0.4%, while WTI oil futures are down 1%.

    [EUR, USD]
    EUR-USD has also been plying a narrow range, in the mid 1.1300s. We are bearish, with Bund yields hitting two-year lows following recent disappointing data out of the Eurozone and with the European Commission yesterday slashing GDP growth projections for the Eurozone economy, to 1.3% for 2019, down from 1.9% previously projected. Brexit uncertainty is also in the mix, which January PMI reports evidenced as having a material impact on economic activity on the British side of the channel, which will have some drag on the continent's side. Juxtaposing this has been relatively upbeat incoming U.S. data, although incomplete and distorted following the one-month-plus partial government shutdown, which has helped offset the Fed's recent pausing of its tightening cycle. A major caveat is the U.S.-China trade relations. U.S. President Trump said yesterday that he did not plan to meet with Xi before the March 1 deadline set by the U.S. and China to achieve a trade deal. No doubt a ploy to up the ante, with the U.S. having pledged to significantly hike tariffs on Chinese imports on March 2, but markets are skittish as the two sides seem to remain a long way apart on the issue of intellectual property, the issue that next week's talks in Beijing will be attempting to bridge. EUR-USD resistance comes in at 1.1380-82, and support at 1.1320-24.

    [USD, JPY]
    The Yen has held steady versus the Dollar and other currencies, despite a risk-off backdrop in global equity markets, although AUD-JPY carved out a four-week low at 77.44. The safe haven theme has been more evident in other markets. German and Japanese debt yields falling to their lowest in over two years, with the 20-year JGB yield falling to a 27-month low. MSCI’s Asia-Pacific index was down 0.5%, and S&P 500 futures off by 0.4%, while WTI oil futures are down 1%. Should risk aversion continue, then USD-JPY will likely at some point break lower. Global growth concerns have ratcheted up, with the RBA, BoE and European Commission all slashing GDP projections for their respective economies over the last day. U.S. President Trump also said that he did not plan to meet with Xi before the March 1 deadline set by the U.S. and China to achieve a trade deal. No doubt a ploy to up the ante, with the U.S. having pledged to significantly hike tariffs on Chinese imports on March 2, but markets are skittish as the two sides seem to remain a long way apart on the issue of intellectual property, the issue that next week's talks in Beijing will be attempting to bridge. USD-JPY has support at 109.07-10.

    [GBP, USD]
    Sterling has settled today after rallying out of weakness on upbeat words by BoE's Carney, with the governor having in his post-meeting press conference provided some balance to the dovish tone of the central bank's communication and lowered GDP projections in its Inflation Report. He said that while Brexit-related uncertainty has risen, pausing the economy's rebalancing away from being consumption reliant, with business investment decisions being delayed, that the overall outlook was still good, especially if a no-deal scenario is avoided. He said that the BoE sees a no-deal Brexit as a low-risk probability (but has prepared for it as a matter of prudence). Cable surged over 1% to 1.2996, up from the 1.2854 low seen in the immediate wake of the BoE's announcement. The pair has since settled in the mid 1.2900s. Sterling is still trading with about a 13%-14% discount relative to levels prevailing ahead of the vote to leave the EU in June 2016, and a good portion of this discount would likely evaporate at the point that a no-deal scenario can be concretely ruled out. The UK government has been keeping, deliberately, the threat of a disorderly no-deal Brexit up in the air, but ultimately we don't think it would allow it to become reality as the vast majority in the government, and in parliament more broadly, are staunchly against the no-deal option. We would also expect the EU to be flexible, if needed to avoid an accidental no-deal Brexit, such as by allowing a delay in the UK's date of exit from the UK.

    [USD, CHF]
    EUR-CHF has remained have after yesterday printing a nine-day low under 1.1375. Broad declines in the Euro have been weighing with incoming data continue to painting a picture of a stagnating Eurozone economy. Earlier in the week the cross had spiked to a three-month high at 1.1443. The price action continues a phase of relatively high volatility the cross has been experiencing. Since early January there have been several bouts of pronounced underperformance in the Swiss franc, often accompanied by talk/suspicions of SNB intervention. 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." 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.

    [USD, CAD]
    USD-CAD is up for a fifth consecutive day, today printing a 13-day high at 1.3329, extending a recovery from last Friday's three-month low at 1.3068. The up phase has been concomitant with a down phased in oil prices, which have tumbled by over 5% from week-ago levels. The Canadian Dollar still remains up by some 2.5% against the U.S. buck on the year-to-date. This has been concomitant with the 15%-plus gain seen in oil prices over the same period. Sustained gains in crude prices are a boon to Canada's terms of trade, and vice versa. USD-CAD has support at 1.3267-70, and resistance at 1.3374-76.

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