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By XE Market Analysis July 13, 2018 3:15 am
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    XE Market Analysis: Europe - Jul 13, 2018

    USD-JPY rallied to a fresh six-month high, of 112.77, as most global stock markets continued to rally, buoyed by a strong global economy and expectations for a solid Q2 corporate earnings reporting season. Chinese markets have still underperformed, however, along with the Australian share market, on concerns about worsening Sino-U.S. trade relations. The weakness in the yen in turn drove an outperformance in Japanese stock markets. Outside the case for USD-JPY, the dollar itself has been mixed. EUR-USD has drifted towards 1.1650 and yesterday's one-week low at 1.1649, and Cable edged out a 10-day low of 1.3162, while the dollar lost a little ground to the Australian dollar and other dollar bloc units.

    [EUR, USD]
    EUR-USD has been heavy, posting a one-week low of 1.1649 yesterday and since seeing little by the way of a rebound. The weightiness of the pair has mostly reflected a perkier dollar, while EUR-JPY has been buoyant on the back of general yen underperformance. We continue to see EUR-USD as being in a broadly consolidative phase, which has been unfolding for over a month now, albeit with a downside tilt presently. This followed a six-week down phase from levels above 1.2400. The range over this overall-sideways 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 the fundamental balance in favour of the dollar, and so the downside of EUR-USD. Any move from Trump to follow-through on hits threats to tariff car imports would also be negative for the euro relative to the dollar. EUR-USD has support is at 1.1645-47.

    [USD, JPY]
    USD-JPY rallied to a fresh six-month high, of 112.77, as most global stock markets continued to rally, buoyed by a strong global economy and expectations for a solid Q2 corporate earnings reporting season. Chinese markets still underperformed, however, along with the Australian share market, on concerns about worsening Sino-U.S. trade relations. The weakness in the yen in turn drove an outperformance in Japanese stock markets. 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). USD-JPY has support at 111.70-71, and resistance at 113.38-40.

    [GBP, USD]
    Sterling has been lacking domestically-driven direction, presently showing fractional gains on the day versus the dollar and euro, and a bigger gain on the generally weak yen. Cable recouped above 1.3200 after edging out a six-session low of 1.3180. Brexit remains front and centre. The prime minister, presently entertaining with U.S. President Trump, appears to have come through the spate of Brexiteer resignations better than many had thought, with a reshuffled Cabinet, replete with a prominent Brexiteer in the position of Brexit Secretary, suggesting that May's pragmatic Brexit plan has, at least, a fighting chance. The government published its white paper (policy document) on its Breixt plan yesterday. In a nutshell, it seeks an "association agreement" with the EU, to include a free trade agreement on goods, but a looser agreement on services -- which the City of London Corporation and finance groups have said would be a "real blow". The plan also calls for a new post-Brexit security partnership while maintaining membership of many EU agencies. The Tory Party's "Brexiteer" camp -- those favouring a complete severance form the EU -- are not pleased, though it remains unclear how they will respond -- whether to acquiesce, or not (they don't have enough numbers to force a change but could be highly disruptive in the legislative process). We have been arguing that the pound will likely retain its 10-15% Brexit discount. The next three months, into the EU leaders' summit in October, where both sides are looking to wrap things up, will be crucial.

    [USD, CHF]
    EUR-CHF printed a seven-week high of 1.1708, despite concurrent heaviness in EUR-USD. 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 below the 10-day high that was seen midweek at 1.3220. The BoC's 25 bp interest rate hike and guidance for tighter monetary policy to keep inflation near target met expectations, with the statement emphasizing a "gradual approach, guided by data." A big dive in oil prices, as Libya announced recommencing supply, brought some selling pressure onto the 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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