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By XE Market Analysis February 21, 2019 3:34 am
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    XE Market Analysis: Europe - Feb 21, 2019

    The Australian Dollar dove sharply, dropping over 1% in making a six-day low at 0.7086. The pair has reversed abruptly after rallying in the wake of a much stronger than anticipated jobs report out of Australia, hit but news that China was banning Australian coal imports out of the port of Dalian and imposing a overall cap on overall Australian coal imports for 2019 at 12 mln tonnes. Coal is Australia's biggest export. Beijing's move comes amid worsening relations between the two nations, on issues such as cyber security and China's policies towards Pacific islands, while China has reportedly been planning to curtail coal imports more generally to lift domestic prices. Elsewhere, the Dollar has been trading firmer on hopes for a breakthrough on the U.S.-China trade front. EUR-USD posted a low of 1.1320, correcting from yesterday's two-week high at 1.1371. Cable has also traded softer, while USD-CAD lifted to the 1.3200 area, up on yesterday's low at 1.3150. USD-JPY has been plying a narrow range in the upper 110.00s, holding below yesterday's four-session high at 110.94. The minutes from the late-January FOMC meeting noted the Fed's patient stance amid various risks, with "many" members unsure what direction rate policy would take. The affirmation of the Fed's policy pause, along with hopes that the U.S. and China are nearing a deal on trade, helped maintain a risk-on theme on Wall Street and in Asia markets. A source cited by Reuters said that Washington and Beijing have started to outline commitments in principle in what is described as the most significant progress yet.

    [EUR, USD]
    EUR-USD posted a low of 1.1320, correcting from yesterday's two-week high at 1.1371. The minutes from the late-January FOMC meeting noted the Fed's patient stance amid various risks, with "many" members unsure what direction rate policy would take. The affirmation of the Fed's policy pause, along with hopes that the U.S. and China are nearing a deal on trade, helped maintain a risk-on theme on Wall Street and in Asia markets. The Dollar has benefitted from the apparent progress on the U.S.-China trade front. A source cited by Reuters said that Washington and Beijing have started to outline commitments in principle in what is described as the most significant progress yet. On the Euro side, concerns about U.S. tariffs on cars imported from the Eurozone along with signs of flagging Eurozone growth momentum and the associated rekindling in ECB dovishness should keep the common currency on an overall weakening track versus the Dollar, given the relative resilience of the U.S. economy. We still class EUR-USD as being in a down trend. Trend resistance comes in at 1.1383-85.

    [USD, JPY]
    USD-JPY has been plying a narrow range in the upper 110.00s, holding below yesterday's four-session high at 110.94. The minutes from the late-January FOMC meeting noted the Fed's patient stance amid various risks, with some members indicating the potential for a hike later this year if the economy performed well, as was expected, while others said it would take firmer than expected inflation to necessitate a hike (what Powell said in his presser). But in general, "many" were unsure what direction rate policy would take. There was also nothing concrete on the timing of the balance sheet runoff, other than perhaps later this year. The affirmation of the Fed's policy pause, along with hopes that the U.S. and China are nearing a deal on trade, helped maintain a risk-on theme on Wall Street and in Asia markets. The MSCI Asia-Pacific (ex-Japan) index rose 0.4% in making a fresh four-and-a-half-month high. Stronger than expected Australian jobs data were also in the mix, though Japanese data showed manufacturing activity posting its first contraction in February for the first time in two-and-a-half years due to weaker domestic and export orders. On the U.S.-China trade front, a source cited by Reuters said the two sides have started to outline commitments in principle in what is described as the most significant progress yet.

    [GBP, USD]
    Sterling has given back some of Tuesday's gains, when the currency had rallied strongly. UK Prime Minister May met with European Commission President Juncker yesterday evening, which produced nothing concrete and we, and the vast majority of observers, expect that the EU will remain implacable to the UK government's desire to time-limit the Irish backstop. The EU, which looks to be betting that May will ultimately prevent a no-deal Brexit scenario (or that parliament will take over and do the same), is essentially attempting to force May into going for a modified withdrawal agreement that could win cross-party support in parliament, which would likely mean a deal that would see the UK remain in the EU's customs union. So far May has shown no interest in going down this route as it would split her Tory party. Out of all the Brexit news noise, one item stands out, which appears to giving the Pound buoyancy: A UK cabinet source cited by the Guardian yesterday said that ministers have noticeably turned against using the no-deal threat as a negotiating tactic. This supports our conviction May and/or parliament, with the help of Brussels if necessary, will ensure that a no-deal Brexit scenario doesn't become a reality. Assuming May is unsuccessful in trying to get a legally-binding concession on the Irish backstop, we think there would realistically be only two ways forward: either a cross-party compromise, at the cost of an irrevocable split in May's Tory party, or a new referendum. Should the EU holds its ground on the Irish backstop, as looks likely, a delay in Brexit would look all but inevitable, too.

    [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 has found a footing after sliding over the last two days, drawn lower as oil prices hit three-month highs. The pair has lifted to the 1.3200 area after posting a two-week low at 1.3150 yesterday. The pair has been trending lower since making a three-week last week at 1.3340. Wholesale trade and retail sales are the next Canadian data releases of note (due today 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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