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By XE Market Analysis February 20, 2019 3:33 am
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    XE Market Analysis: Europe - Feb 20, 2019

    The Dollar has traded mostly firmer against the other main currencies, though lost ground to the Yuan and other Asian currencies after a Bloomberg report yesterday suggested that the U.S. is set on securing a pledge from China that it will not devalue its currency as part of a trade deal. China's foreign ministry says it won't use currency depreciation (and has in fact always denied that it has). This came amid some upbeat remarks from both Chinese officials and President Trump himself with regard to the ongoing trade discussions, with the latter suggesting again that the March-1 deadline could be pushed out. This added some fresh fuel into what had been a flagging risk-on theme in global markets. The MSCI Asia-Pacific equity index rose over 1% in printing a four-and-a-half month high, while China's SSE equity index is now showing a year-to-date gain of 18%. In the forex realm, USD-JPY lifted to a three-session high of 110.93. Most Asian currencies rallied, whish pushed USD-THB, for instance, into five-year low territory. The narrow trade-weighted USD index posted moderate gains, ending several sessions of declines. EUR-USD drifted back to the 1.1335-40 area after posting a two-week high at 1.1357. AUD-USD also saw a two-week high, at 0.7176, but subsequently held up better than EUR-USD. Fed's Williams said he was comfortable with the pause in interest rates, and that the balance sheet roll-off would continue at least into next year at an unaltered pace, and not by the end of this year as markets have been speculating.

    [EUR, USD]
    EUR-USD drifted back to the 1.1335-40 area after posting a two-week high at 1.1357. The high was a reflection of dollar weakness after Fed's Williams said he was comfortable with the pause in interest rates, and that the balance sheet roll-off would continue at least into next year at an unaltered pace, and not by the end of this year as markets have been speculating. We still class as EUR-USD being in a down trend, with the prevailing rise in the pairing being a rebound from the latest new low in the trend, which was the three-month low seen last week at 1.1234. Trend resistance comes in at 1.1390-93.

    [USD, JPY]
    USD-JPY lifted to a three-session high of 110.93 and the China proxy AUD-JPY cross posted a two-week high at 79.51. The gains in both reflect a continued Yen underperformance theme, which has been seen concurrently with an ongoing risk-on theme in global markets and after BoJ Governor Kuroda yesterday said further monetary easing could be employed if needed. The Yuan and other Asian currencies rose after a Bloomberg report yesterday suggested that the U.S. is set on securing a pledge from China that it will not devalue its currency as part of a trade deal. China's foreign ministry says it won't use currency depreciation (and has in fact always denied that it has). This came amid some upbeat remarks from both Chinese officials and President Trump himself with regard to the ongoing trade discussions, with the latter suggesting again that the March-1 deadline could be pushed out. This added some fresh fuel into what had been a flagging risk-on theme in global markets. The MSCI Asia-Pacific equity index rose over 1% in printing a four-and-a-half month high, while China's SSE equity index is now showing a year-to-date gain of 18%. USD-JPY has support at 110.30-33, and resistance at 111.05-07.

    [GBP, USD]
    Sterling rallied strongly against the dollar and euro, among other currencies, yesterday after a spokesman of UK prime minister said that today's meeting between May and the president of the European Commission, Juncker, will be "significant." He confirmed that May will looking for a legally binding concession on the Irish backstop (such as time limiting it). For many observers, the UK government seems to be living in a Twilight reality, as the EU has continued to remain perfectly implacable on the Irish backstop being a red line that cannot be crossed. Nonetheless, this was a trigger for pound buying. Sterling is now stronger by an averaged 2.8% versus the dollar, euro and yen on the year-to-date, reflecting a modest unwind of the Brexit discount the pound has been trading at. We estimate that the UK's currency continues to trade at a discount of 13-15% in trade-weighted terms compared to levels prevailing ahead of the vote to leave the EU in June 2016. The Economist's Big Mac index suggests the pound is 26% undervalued against the U.S. dollar. As the Economist calculates, a Big Mac costs £3.19 in the UK and US$5.58 in the U.S, which implies an exchange rate of 0.57. Given the difference between this and the actual exchange rate, 0.77, the pound is 26% undervalued. We don't see scope for a sustained rebound in the pound until the point that a no-deal Brexit scenario can be concretely ruled out.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.1300s after correcting from a six-day high that was seen last 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 is down for a second day, this time printing a two-week low at 1.3183. The pair has been trending lower since making a three-week last week at 1.3340. A rally in oil prices, which has lifted the WTI benchmark to three-month highs near $57.0, 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. Wholesale trade and retail sales are the next Canadian data releases of note (due Thursday and Friday, respectively). We expect the former to fall 0.5% in December after a 1.0% drop in November, while we anticipate retail sales dipping 0.1% in December after the 0.9% decline in November. As-expected data would track our projection for a 0.1% decline in December GDP after a 0.1% loss in November, consistent with the BoC's view that the oil price plunge will temporarily slow GDP in Q4 and Q1. USD-CAD has support at 1.3148-50.

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