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By XE Market Analysis July 8, 2019 4:03 am
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    XE Market Analysis: Europe - Jul 08, 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 posted a narrow range around 1.1220-30, consolidating the losses from the upper 1.1200s that were seen on Friday as markets unwound Fed easing expectations in light of the June U.S. employment report. Aside from the flow and then ebb in Fed rate cut expectations, in the Euro's case market narratives have been centering on weak data (the latest being a 2.2% m/m contraction in May German manufacturing orders) and the dovish credentials of ECB boss designate, Lagarde, which last week tipped Bund yield curve into negative right out to the 20-year maturity, while the 10-year yield flirted with -0.400%. EUR-USD has support at 1.1205-07, and resistance at 1.12.85-88.

    [USD, JPY]
    The Yen picked up moderate demand during the Tokyo session as stock markets across Asia came under pressure, with markets more focused on the impact of Friday's above-forecast U.S. jobs report on Fed easing prospects rather than on the economic good news. Amid this there are also some pessimistic outlooks in market narratives. Morgan Stanley equity analysts, for instance, are advising investors to lower equity positions on their concerns for looser monetary policy to offset weak economic growth. This backdrop saw the MSCI Asia-Pacific (ex-Japan) index rack up losses of over 1%. S&P 500 futures, meanwhile, were showing a decline 0.3% at the lows. In forex markets, the magnitude of movements have remained small, as is typical for a Monday in pre-Europe trading in Asia. USD-JPY ground lower from levels above 108.50, reaching a 108.28 low. The pair remain comfortably within its Friday range, and settled at near flat levels from levels seen this time last week. EUR-JPY and other Yen crosses also saw a downward drift.

    [GBP, USD]
    Cable settled after diving to a six-month low on Friday at 1.2481 following the U.S. jobs report. EUR-GBP remained buoyant, but makrets still lacked the muster for a test of the recent six-month high at 0.6992. A 0.3% m/m contraction in the Halifax measure of UK house prices (released Friday) was the latest in a series of data disappointments out of the UK. Last week's June PMI surveys laid bare the impact of both prolonged Brexit-related uncertainty and slowing economic activity in continental Europe. The June composite PMI fall sharply to 49.2 from May's 50.7, signalling economic contraction. 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 will be later in the 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 1.2550-55.

    [USD, CHF]
    EUR-CHF has put in a couple of weeks of steady, range-bound trading after dropping sharply in mid June as markets adjusted to increased prospects for the ECB to return to the dovish policy tap. The cross printed a two-year low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will 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 last 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 remained settled around 1.3080 after turning on Friday following the release of the U.S. and Canadian jobs reports for June, which cast a net bearish impact on the pairing. The pair has been in a distinct bear trend since late May, and has declined in four of the last five weeks. We expect more is to come. Trend resistance comes in at 1.3091-94.

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