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By XE Market Analysis July 5, 2019 3:29 am
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    XE Market Analysis: Europe - Jul 05, 2019

    The Dollar has been traded firmer into the London interbank open, edging out a three day high against the Yen and making moderate advancements against the Euro, Canadian dollar and other currencies. USD-JPY's high is 109.73, we retraces about a third of the safe-haven driven declines the pair saw in the early part of the week. EUR-USD has come within a pip of yesterday's low at 1.1273, with market narratives focus on 10-year Bund yields flirtation with -0.400% offsetting the Fed's course to further easing. AUD-USD has posted a two-day low at 0.7015, with the pair giving back nearly a third of the gains seen from the low seen in the immediate wake of the RBA rate cut on Tuesday. USD-CAD has lifted back above 1.3050 after posting a fresh nine-month low at 1.3037 yesterday. A softening in oil prices looks to have helped take some of the wind out of the Canadian dollar's sails. The focus today is squarely on the release of the June U.S. employment report. Downside risk abounds. We expect a 160k June nonfarm payroll rise (median 165k) after the disappointing 75k increase in May. We see a steady jobless rate alongside gains of 0.2% for hours-worked and 0.3% for hourly earnings (median same). Our June estimate is just below the 164k year-to-date average, and well under the 223k average in 2018.

    [EUR, USD]
    EUR-USD edged out a new 1.1273, which is just 5 pips from yesterday's low. While the Fed remains on course to cut rates on July 31, market narratives have been centering on the ECB's further turn to the dovish side, which has tipped the Bund yield curve into negative right out to the 20-year maturity, while the 10-year yield has fallen below -0.40%, below the deposit rate. This backdrop is keeping EUR-USD a sell-on-rallies trade, although commitment is low amid the U.S. holiday and ahead of tomorrow's release of the June payrolls report. Support comes in at 1.1271-73, and resistance at 1.1305-08.

    [USD, JPY]
    USD-JPY remained within recent ranges, buoyant but bereft of impetus for a challenge of yesterday's high at 107.88. USD-JPY looks to have entrenched itself in a rough 106.50-108.50 range. Resistance comes in at 108.04-07.

    [GBP, USD]
    Cable has found a footing after three straight down days, which on Wednesday culminated in a 16-day low at 1.2557. The pair has since taken root around 1.2575-90. EUR-GBP has similarly come to a directional halt below the six-day high seen at 0.8990, which is just 2 pips short of the six-month peak that was seen last week. This week's June PMI survey data, which saw the June composite PMI fall sharply to 492 from May's 50.7, painted a picture of a stagnating economy, brought on by both prolonged Brexit-related uncertainty and slowing economic activity in continental Europe. As for Brexit, the news flow has remains quiet in terms of substantive developments. That will change as soon as the new prime minister, most likely no-deal-Brexit-if-necessary Boris Johnson, takes up the reigns (which should be by mid month). 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 resistance at 1.2610-13.

    [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 has lifted back above 1.3050 after posting a fresh nine-month low at 1.3037 yesterday. A softening in oil prices looks to have helped take some of the wind out of the Canadian dollar's sails. Focus today is no the release of June employment reports out of both the U.S. and Canada, which present downside risks to USD-CAD as downside risk abounds with regard to the U.S. release from initial claims as auto retooling begins, and producer sentiment indicators have shown a June pull-back. The vehicle sector should be a drag as well, as both the assembly rate and vehicle sales take back some of their May gains. WE expect a 160k June nonfarm payroll rise (median 165k) after the disappointing 75k increase in May. We see a steady jobless rate alongside gains of 0.2% for hours-worked and 0.3% for hourly earnings (median same). Our June estimate is just below the 164k year-to-date average, and well under the 223k average in 2018. As of the Canadian jobs report, we expect a 20.0k rise (median 10.5k) in June after the 27.7k rise in May, continuing the modest improvements after the stunning record one-month gain of 106.6k in April. The unemployment rate is seen at 5.4% in June from 5.4% in May.

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