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By XE Market Analysis July 1, 2019 4:24 am
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    XE Market Analysis: Europe - Jul 01, 2019

    The Dollar has firmed up amid a strong post-G20 risk-on theme ensued, which has been interpreted by markets as meaning that the Fed is less likely to cut rates aggressively, with narratives promoting the view that latest truce in the U.S.-Chain trade war will at the least kill the possibility for the Fed to cut rates by 50 bp at its July FOMC. The USD index (DXY) rallied by nearly 0.5% in making a 10-day high at 96.54. EUR-USD printed a 10-day low at 1.1321, while Cabe and AUD-USD also tracked lower, the latter posting a two-session low at 0.6991. USD-CAD edged out a two-session high at 1.3108. Amid this backdrop, there was a concurrent theme of Yen underperformance, particularly during the early part of Asia-Pacific trading. USD-JPY surged to a 12-day high at 108.52, while EUR-JPY and AUD-JPY, among other Yen crosses, also rallied. The U.S. and China agreed on Saturday to restart trade talks in what was more many observes a more conciliatory than expected meeting, with Trump describing China as a "strategic partner." President Trump offered concessions to President Xi, holding off on new tariffs while easing of restrictions on tech company Huawei. China agreed to make unspecified new purchases of U.S. farm products and return to the negotiating table. But, Trump emphasized that the holding back on new tariffs was only "for the the being," and, with regard to Huawei, said that the company will remain on the blacklist, and that its future won't be decided until end of trade talks.

    [EUR, USD]
    EUR-USD printed a 10-day low at 1.1321, driven by broad Dollar gains as the renewed truce in the U.S.-China trade war ignited a lowering in Fed easing expectations. This should leave the one-month high seen last week at 1.1412 out of reach for now, and we expect a neutral-to-declining bias over the coming phase. Bigger picture, EUR-USD has been in a bear trend since early 2018, though downside momentum has abated markedly in recent months, with the pairing looking to have found a rough equilibrium. Support comes in at 1.1344-47.

    [USD, JPY]
    USD-JPY surged to a 12-day high at 108.52, while EUR-JPY and AUD-JPY, among other Yen crosses, also rallied as the Japanese currency saw some of is safe-haven premium unwind following the latest truce in the U.S.-China trade war, which marked a return to negotiations. The U.S. and China agreed on Saturday to restart trade talks in what was more many observes a more conciliatory than expected meeting, with Trump describing China as a "strategic partner." President Trump offered concessions to President Xi, holding off on new tariffs while easing of restrictions on tech company Huawei. China agreed to make unspecified new purchases of U.S. farm products and return to the negotiating table. But, Trump emphasized that the holding back on new tariffs was only "for the the being," and, with regard to Huawei, said that the company will remain on the blacklist, and that its future won't be decided until end of trade talks. Key difference around industrial strategy and national security remain, however, particularly U.S. accusation that China has been cheating its way to tech dominance. With 11 rounds of trade talks having come and gone, it remains unclear whether these differences can be resolved. For now, USD-JPY's directional bias looks to be toward the upside. Support comes in at 108.04-07.

    [GBP, USD]
    The UK currency has traded near net flat over the last week in our estimate of its trade-weighted value, which follows a phase of consistent weakness since early May as markets discounted the expected economic consequences of prolonged Brexit and political uncertainty in the UK, with the added prospect that the no-deal-Brexit-if-necessary Boris Johnson is the strong favourite/near certainty to become the new prime minister. The Brexit issue has gone largely dormant, but is sure to erupt once the new PM picks up the reins (expected mid July). There is a group of parliamentary members are working on a plan to prevent a no-deal Brexit by withholding government funding, if necessary, responding to Boris Johnson having made noises about circumventing parliament to achieve a no-deal Brexit. We estimate that the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and don't see much scope for this to reverse anytime soon. Cable has support at 1.2650-52, and resistance at 1.2749-50.

    [USD, CHF]
    EUR-CHF has found a footing after coming under signifiant pressure last week in the wake of ECB President Draghi's eyebrow-raising dovish shift last month, which has been the most notable of a growing chorus of dovish voices on the central bank's governing council. The cross printed a 23-month low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will doubtlessly be displeasing to the SNB (the EUR-CHF cross being a good proxy on the Swiss currency's trade weighted value). The SNB restated at its quarterly policy review this month that downside risks to the economy have increased, and that the overall policy setting "remains as expansionary as before." The central bank also nudged its inflation forecast lower, now expecting CPI to average just 0.6% y/y this year, 0.7% in 2020, and 1.1% y/y in 2021. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. Assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a declining bias. The SNB's -0.75% deposit rate and threat of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

    [USD, CAD]
    USD-CAD edged out a two-session high at 1.3108, driven by a U.S. Dollar-bullish shift in U.S. over Canadian yield differentials as markets price-in a less extensive path of Fed easing following news of the latest truce in the U.S.-China trade war. The pair last week printed an eight-month low at 1.3059. While both the U.S. and China offered concessions, and will return to the negotiating table, key difference around industrial strategy and national security remain, particularly the U.S. accusation that China has been cheating its way to tech dominance. With 11 rounds of trade talks having come and gone, it remains unclear whether these differences can be resolved. Another variable USD-CAD market participants will be monitoring is oil prices, which have surged nearly 3% today. This should curtail USD-CAD's upside potential. The pair has resistance at 1.3128-30, and support at 1.3080-85.

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