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By XE Market Analysis July 5, 2018 3:06 am
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    XE Market Analysis: Europe - Jul 05, 2018

    The euro is opening Europe firmly, with EUR-USD testing the week's highs at 1.1690-91, EUR-JPY posting two-day highs above 129.35 and EUR-CHF ascending into three-week high territory. The dollar, outside the case against the euro, has been trading neutrally, including against most emerging world currencies. The PBoC continued to rein in the yuan, with the offshore USD-CNY rate of 6.6478-80 holding below Tuesday's 11-month low seen at 6.7344. USD-JPY continued to orbit the 110.50 level. The stability in currencies belies a heightened state of concern about trade protectionism, with the U.S. on Friday set to implement tariffs on $34 bln of Chinese imports, although equity market weakness, especially in China-focused issues, have taken a whack today.

    [EUR, USD]
    The euro opened Europe firmly, with EUR-USD testing the week's highs at 1.1690-91, EUR-JPY posting two-day highs above 129.35 and EUR-CHF ascending into three-week high territory. Unexpected upward revisions to final Eurozone June services and composite PMIs helped buoy the common currency, which remains over a big figure from last week's lows, having been underpinned by last week's agreement among EU members on immigration (to shore up external borders and create screening centres for migrants). This, along with Merkel's compromise on border controls, which saved the governing coalition in Germany, has reduced the existential-threat discount that had been built into the euro, on the view that this should placate the Italian populist government and broader Eurosceptic, populist movements across the region. Bigger picture, the EUR-USD remains in broadly consolidative phase after a downtrend from mid-April levels above 1.2400. The range over this phase has been 1.1508 to 1.1851. More of the same looks likely for now.

    [USD, JPY]
    USD-JPY has continued to orbit the 110.50 level. The pair remains in a broadly choppy, sideways range, which has been unfolding over the last couple of months. More of the same looks likely, with bullish fundamentals (Fed versus BoJ policy paths) being offset by the risks stemming from a deepening and prolonging trade way among major economies, a backdrop that has the Japanese currency in demand as a safe haven.

    [GBP, USD]
    Cable has posted a one-week high of 1.3250, and the pound has also gained on the yen, among other currencies, though has lost ground to the outperforming euro. Sterling had been buoyed by yesterday's release of an above-forecast UK services PMI survey for June. The PMI headline rose to 55.1, the strongest rate of expansion since October 2017 and up from 54.0 in May. The median forecast had been for an unchanged 54.0 reading. The composite PMI came in at 55.2, well up on the 54.5 median forecast. Overall, the June PMI surveys painted a picture of rekindled expansion in the economy, with cost pressures rising and some evident tightness in labour markets. The data maintains our call for the BoE to continue with its gradualist tightening at the August MPC meeting. Despite this, we remain somewhere between bearish and neutral of sterling at prevailing levels. The Brexit negotiation process, which has just six negotiating weeks left, is coming to a head amid a sense that risk of the UK leaving the EU without a new trade-deal having gone from highly unlikely to possible. Cable has resistance at 1.3260.

    [USD, CHF]
    EUR-CHF has lifted above 1.1600 for the first time in three weeks amid a broader run higher of the common currency. SNB's Maechler said late last month that the franc "remains highly valued" despite the depreciation seen over the last year, arguing that "we are in extraordinary times and we are using unconventional measures. The comments affirm that the SNB is firmly on hold, with Maechler admitting that the SNB's monetary policy room for manoeuvre is "necessarily" affected by the actions of ECB and Fed.

    [USD, CAD]
    USD-CAD has settled in the mid 1.31s after correcting from a one-year high that was pegged at 1.3387 last Wednesday. Expectations for the BoC to hike rates next week along with the big surge in oil prices have buoyed-up the Canadian dollar. USD-CAD has resistance 1.3210-11. Upcoming Canadian data include the June employment report (Friday), which we expect to rise 25.0k after the 7.5k dip in May and 1.1k dip in April. The unemployment rate is expected to hold at a 40-year low 5.8%. Trade data (also due Friday) is expected to show the deficit widen to -C$2.2 bln in May from -C$1.9 bln in April. Data in line with our estimates would support our expectation that the BoC will lift rates 25 bp to 1.50% at the July-11 announcement.

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