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By XE Market Analysis July 10, 2018 3:11 am
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    XE Market Analysis: Europe - Jul 10, 2018

    The dollar has firmed up while the yen has underperformed ahead of the London interbank open. The solid U.S. jobs report last Friday and expectations for a strong corporate earnings season have been buoying equities, although Chinese share markets have continued to underperform and there is a palpable underlying sense that the U.S.-led trade way with major economies is curtailing bullish sentiment. The pound took a hit late yesterday, just before and after the London closing, on news that British Foreign Secretary Boris Johnson resigned in protest of the "soft Breixt" approach the Cabinet voted on on Friday. This followed the resignation of Brexit Secretary David Davies, and there concern is that this could develop from the politically problematic, from the perspective of Prime Minister May, to a party crisis and leadership challenge, with Johnson the challenger. Cable dove from levels above 1.3300 to a low of 1.3188, since settling around the 1.3250 mark. EUR-USD, meanwhile, has corrected some of the recent gains, dropping to the 1.1750 area after yesterday seeing a three-week high at 1.1790. USD-JPY broke above recent range highs and printed a seven-week high at 111.14. EUR-JPY and other yen crosses are also up, with EUR-JPY trading in seven-week high terrain and AUD-JPY making one-month highs.

    [EUR, USD]
    EUR-USD has corrected some of the recent gains, dropping to the 1.1750 area after yesterday seeing a three-week high at 1.1790. We still class EUR-USD as being in a broadly consolidative phase, which has been unfolding for over a month now following about a six-week downtrending phase from levels above 1.2400. The range over this period has been 1.1508 to 1.1851. More of the same looks likely for now. A major "known unknown" is to how deep and how prolonged the Trump-led trade war with major economies will be, and what economic and currency market fallout this will cause. This is, for now, curtailing directional commitment.

    [USD, JPY]
    USD-JPY has broken above recent range highs and printed a seven-week high at 111.14. EUR-JPY and other yen crosses are also up, with EUR-JPY trading in seven-week high terrain and AUD-JPY making one-month highs. The driver of the yen's underperformance is the continued rebound in global stock markets, although Chinese shares continue to underperform. The solid U.S. jobs report last Friday and expectations for a strong corporate earnings season have been buoying equities, and while the shift toward trade protectionism remains at the top of the worry list of investors, the level of implemented tariffs so far is small in the scheme of things. BoJ Governor Kuroda yesterday repeated that the central bank will remain committed to ultra-accommodative monetary policy, including yield-curve control, until inflation hits the 2% target. USD-JPY has support at 110.88-90 while the May-21 high at 111.39, which is the highest level seen since mid January, provides an upside waypoint.

    [GBP, USD]
    The pound took a hit late yesterday, just before and after the London closing, on news that British Foreign Secretary Boris Johnson resigned in protest of the "soft Breixt" approach the Cabinet voted on on Friday. This followed the resignation of Brexit Secretary David Davies, and there concern is that this could develop from the politically problematic, from the perspective of Prime Minister May, to a party crisis and leadership challenge, with Johnson the challenger. Cable dove from levels above 1.3300 to a low of 1.3188, since settling around the 1.3250 mark. We anticipate the pound will remain a sell-on-rallies trade.

    [USD, CHF]
    EUR-CHF logged a seven-week high at 1.1659 before turning lower amid EUR-USD's pullback. 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 recouped back above 1.3100 after yesterday posting a three-week low at 1.3066, which extended the correction from a one-year high that was pegged at 1.3387 in late June. Expectations for the BoC to hike rates this week, along with the big surge in oil prices have being buoying the Canadian dollar, though this theme has now looked to have come to a pause. We expect the BoC to hike interest rates on Wednesday by 25 bp, which would take the overnight target rate to 1.50%. The accompanying monetary policy report should be consistent with additional rate increases, though at a gradual pace. USD-CAD has support at 1.3053-55, and resistance at 1.3150-53.

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