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By XE Market Analysis July 11, 2018 2:43 am
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    XE Market Analysis: Europe - Jul 11, 2018

    The dollar majors have traded in narrow ranges so far today amid a tone of heightened caution as stock markets take a fresh tumble, led by Chinese bourses, due to another ratchet in trade warning tensions between the U.S. and China. U.S. index futures have also seen heft declines. USD-JPY has settled lower, near the 111.0 mark, after printing a seven-week high at 111.35 yesterday, while AUD-JPY, a relatively high beta cross, is down quite sharply, by over 0.6%. AUD-USD is down by a similar magnitude. Most emerging market currencies have also come under pressure against the dollar, giving back some of their rebound gains seen in recent sessions. EUR-USD has lifted back above 1.1700, rebounding from yesterday's three-session low at 1.1690. The pair has been trading in a broadly sideways, at times choppy, range for over a month now, and we anticipate more of the same.

    [EUR, USD]
    EUR-USD has lifted back above 1.1700, rebounding from yesterday's three-session low at 1.1690. We continue to see the pair as being in a broadly consolidative phase, which has been unfolding for over a month now, which followed a six-week down 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 settled in the lower 111.0s after printing a seven-week high at 111.35 yesterday. A backdrop of lower stock markets in Asia, led by Chinese stocks, and hefty losses being seen by U.S. index futures, due to a fresh ratchet in trade warning tensions between the U.S. and China, suggests there is potential for the yen's safe haven premium to increase. So far this has been expressed mostly via higher beta yen cross rates, such as AUD-JPY and yen rates against emerging market currencies. The AUD-JPY cross has shed over 0.7%. USD-JPY has support at 110.88-90. The May-21 high at 111.39, which is the highest level seen since mid January, was left unchallenged during yesterday's ascent.

    [GBP, USD]
    Sterling has settled to a stasis following the resignation of prominent Brexiteers in the wake of the government's climatic Cabinet meeting last Friday. Life goes on, with the prime minister having quickly replaced Boris Johnson as Foreign Secretary with Jeremy Hunt, the former Health Secretary, and Dominic Raab, a prominent Brexiteer, as the new Brexit Secretary -- the latter appointment showing that there at least some Brexiteers are going with the "softer Brexit" approach. It looks like, for now at least, that Brexiteers won't have sufficient numbers to call for a no confidence note on Prime Minister May nor block government measures. But there remains the uncertainty of how the EU will react to the government's plan for Brexit, with just five negotiating weeks left until October, when both the UK and the EU are looking to wrap things up ahead of Brexit-Day on 29th March next year. We estimate that the market has built in about a 10-15% discount to the pound's trade-weighted value since the vote to leave in June 2016, and we expect this discount to remain in place until such time that a clearer picture emerges. Cable has resistance at 1.3286-88, and again at 1.3309-10. Support comes in at 1.3218-20.

    [USD, CHF]
    EUR-CHF has settled to the lower 1.1600s after yesterday posting seven-week high at 1.1659. 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 back above 1.3100 over the last day after posting a three-week low at 1.3066 on Monday, 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 today, along with the recent big surge in oil prices, had buoying the Canadian dollar, though this theme now looks to have come to a pause. We expect the BoC to hike interest rates 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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