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By XE Market Analysis February 18, 2019 4:00 am
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    XE Market Analysis: Europe - Feb 18, 2019

    The Yen traded softer amid a risk-on backdrop in Asian markets leading into the London interbank open. USD-JPY posted a two-session high at 110.59, while EUR-JPY and AUD-JPY also lifted into two-session high terrain. This was seen concurrently with the MSCI Asia-Pacific (ex-Japan) equity index rising by nearly 1%. Japan's Nikkei 225 closed with a 1.8% gain, while China's SSE outperformed with a gain of 2.7%. Hopes that the U.S. and China will reach a deal during this week's discussions in Washington, alongside hopes that major central banks will return to the stimulus taps again, have been underpinning investor positivity. There is a narrative in markets that the U.S. and China are ripe for making compromises on trade given concerns about slowing global growth. Markets, meanwhile, are expecting this Wednesday's release of the Fed's minutes from the late-January FOMC meeting, which made the dovish turn, will show policymakers in a cautious mood, and also show a deceleration in the pace of post-QE balance sheet shrinkage. The ECB's Olli Rehn said over the weekend that recent data show weakening in the Eurozone economy, fitting speculation that the central bank is heading for another blast of Targeted Long-Term Refinancing Operations (TLTRO) to buoy bank lending. This speculation has been weighing on the Euro recently, although EUR-USD has managed to settle higher, in the low 1.1300s, up from the three-month low seen on Friday at 1.1234.

    [EUR, USD]
    EUR-USD has managed to settle higher, in the low 1.1300s, up from the three-month low seen on Friday at 1.1234. The low was seen amid speculation that the ECB is heading for another blast of Targeted Long-Term Refinancing Operations (TLTRO) to buoy bank lending. Remarks from ECB's Olli Rehn over the weekend fitted this them, as he said that recent data show a weakening in the Eurozone economy. However, the Fed is also amid a dovish phase. Markets are expecting this Wednesday's release of the Fed's minutes from the late-January FOMC meeting to show policymakers in a cautious mood, and also show a deceleration in the pace of post-QE balance sheet shrinkage. Overall, we expect the EUR-USD to proceed with a flat-to-lower directional bias. Resistance comes in at 1.1335-40.

    [USD, JPY]
    USD-JPY posted a two-day high at 110.61. AUD-JPY, meanwhile, gained nearly 0.5%, marginally beating EUR-JPY into second spot in the biggest mover stakes. This reflects part moderate Aussie dollar outperformance and part moderate yen underperformance. The cross came off its highs, however, with risk appetite fading across European equity bourses, and with S&P 500 futures showing fractional declines, failing to follow the upbeat session in Asia. AUD-JPY printed a two-session higher during the Sydney session at 79.14, since settling near the 79.0 mark. AUD-USD posted a 13-day high, at 0.7159. The pair is up 1.4% on the year-to-date, and by 2.3% and 2.8% against the yen and euro, respectively, over the same period. Much of the gains reflect the Aussie dollar's recovery from late-December losses, build on the view that the U.S. and China will reach some sort of compromise on the trade front, and by the encouragement of Beijing's stimulus efforts. The antipodean currency is widely treated as a liquid forex market proxy on China. In Asian stock markets, the MSCI Asia-Pacific (ex-Japan) equity index rose by nearly 1%. Japan's Nikkei 225 closed with a 1.8% gain, while China's SSE outperformed with a gain of 2.7%. Hopes that the U.S. and China will reach a deal during this week's discussions in Washington, alongside hopes that major central banks will return to the stimulus taps again, have been underpinning investor positivity. Any good news on this front would have the potential to spark a rally in USD-JPY. The pair has support at 109.90-94, and resistance at 111.05-07.

    [GBP, USD]
    Cable has lifted firmly back 1.12900 on the back of a softer Dollar. Market participants are both weary and wary about Brexit. There has been little sign that Brussel's will give the UK government the concession it wants on the Irish backstop. Nor has there been any inkling that the divided parties in parliament will be able to ham out a compromised deal. UK Prime Minister May's humiliating defeat in the House of Commons last week, in a motion that was meant to endorse the government's negotiating strategy, doesn't have legal relevance, but has eroded her authority, which some political pundits suggest has defanged her tactic to pressure support for her deal or risk an exit from the EU without a deal. The next key data for the calendar is February 27, when parliament will vote on the government's plan, if there is one, or alternatives. It is also possible, if not quite likely, that parliament might at that juncture vote to rule out a no-deal Brexit scenario. Overall, the long-awaited clarity on Brexit doesn't look likely to happen for a while yet. The should maintain the 13-15% discount the pound has been trading at in trade-weighted terms since the vote to leave the EU in June 2016.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.1300s after a third-day decline, which on Friday left a six-day low at 1.1332. This extended the decline from the five-day high that was seen Tuesday at 1.1406. The price action has continued a phase of relatively high volatility that 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, 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 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 has ebbed back to the lower 1.3200s, down from the three-week seen last week at 1.3340. A rally in oil prices, which has lifted the WTI benchmark to three-month highs above $56.50, has underpinned the Canadian Dollar. There are also market expectations for the release of the Fed's minutes to show the central bank to be lessening the rate of post-QE balance sheet shrinkage. USD-CAD has resistance at 1.3266-70, and support at 1.3196-98.

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