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By XE Market Analysis July 12, 2018 3:14 am
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    XE Market Analysis: Europe - Jul 12, 2018

    The yen has weakened amid a risk appetite revival in global asset markets amid a de-escalation in trade tensions, with both Washington and Beijing signalling a willingness to re-start bilateral negotiations. USD-JPY rallied to a six-month high of 112.38 after breaking above the May high at 111.39. EUR-JPY lifted into three-week high terrain, and AUD-JPY reversed most of the outsized losses the cross had seen yesterday (following Trump's threat to slap tariffs on a further $200 bln worth of Chinese imports). The yen's weakness reflects a unwinding in the currency's built-in safe haven premium, which has allowed market participants to re-focus on bullish fundamentals of USD-JPY (with the Fed on a tightening course while the BoJ remains fully committed to maintaining ultra-accommodative monetary policy). Emerging market currencies rebounded as higher beta assets and currencies found fresh demand. EUR-USD has been in consolidation mode, holding a narrow range in the upper 1.1600s, above the five-session low posted yesterday at 1.1665.

    [EUR, USD]
    EUR-USD has been in consolidation mode, holding a narrow range in the upper 1.1600s, above the five-session low posted yesterday at 1.1665. The euro more than gave back gains after rallying on reports that some ECB members are looking to hike interest rates in July, the currency falling back on the realization that this is July 2019. We continue to see EUR-USD as being in a broadly consolidative phase, which has been unfolding for over a month now, following 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, though strong U.S. economic growth and the Fed's tightening course tip fundamental balance in favour of the dollar, and the downside of EUR-USD. Support is at 1.1645-47.

    [USD, JPY]
    USD-JPY has rallied to a six-month high of 112.38 after breaking above the May high at 111.39. EUR-JPY, meanwhile lifted into three-week high terrain, and AUD-JPY reversed most of the outsized losses the cross had seen yesterday (following Trump's threat to slap tariffs on a further $200 bln worth of Chinese imports). The yen's weakness reflects a unwinding in the currency's built-in safe haven premium, which has allowed market participants to re-focus on otherwise bullish fundamentals of USD-JPY (with the Fed on a tightening course while the BoJ remains fully committed to maintaining ultra-accommodative monetary policy). A de-escalation in trade tensions is the cause, with Washington and Beijing signalling a willingness to re-start bilateral negotiations. USD-JPY has support at 111.70-71, and resistance at 113.38-40.

    [GBP, USD]
    Cable has settled lower, near the 1.3200 level and above the week's low at 1.3188. Brexit remains front and centre for sterling markets. The fact that Prime Minister May has survived the mini-exodus of Brexiteer resignations, and replaced David Davis with Dominic Raab, a committed Brexiteer, in the position of Brexit Secretary, is in theory a positive for the pound, implying May's pragmatic plan has a chance. But there remain uncertainties. The white paper (policy document) on the Brexit plan will be published today, which will allow markets to get a better sense of how the EU is likely to respond. It is also uncertain how the hard Brexiteer camp within the governing Tory Party will respond -- to acquiesce, or to not acquiesce -- with regard to the Cabinet-approved "soft" approach to Brexit. Boris Johnson, the biggest fish in the Brexiteer pond, is reportedly contemplating his next move. Then there is the problem of time, with the government having taken two years to come up with a viable plan, leaving only five negotiation weeks to hammer out an agreement with the EU. Given this backdrop, we expect to pound to retain its 10-15% Brexit discount relative to a trade-weighted basket of other currencies.

    [USD, CHF]
    EUR-CHF has settled to the lower 1.1600s after posting seven-week high at 1.1659 earlier in the week. 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 rebounded to a 10-day high of 1.3220 from a 1.3063 low that was seen on a by-CAD reaction to the BoC's 25 bp interest rate hike and guidance for tighter monetary policy to keep inflation near target. However, the statement also emphasized a "gradual approach, guided by data." A 4%-plus dive in oil prices, as Libya announced recommencing supply, subsequently prompted selling of Canadian dollars, given the sensitivity of Canada's terms of trade position to crude prices. USD-CAD has support at 1.3150-53.

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