Home > XE Currency Blog > XE Market Analysis: Europe - Jul 18, 2019

AD

XE Currency Blog

Topics6796 Posts6841
By XE Market Analysis July 18, 2019 3:46 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 4720
    XE Market Analysis: Europe - Jul 18, 2019

    The Dollar has traded softer amid a reappraisal for the chances of the Fed entertaining an outsized 50 bp rate hike at the upcoming FOMC meeting, which has been concomitant with a WSJ report suggesting that trade negotiations between the U.S. and China are at a "standstill." This was followed by fresh evidence of the impact that trade tensions have been having, with Japanese trade data revealing a worse-than-expected 6.7% y/y contraction in exports, which have shrank for seven straight months now. There was also an unexpected rate cut, of 25 bp, by South Korea's central bank, which has had the effect of fanning rekindling speculation for the Fed to be more aggressive at the stimulus spigot. In the mix is an article in the London Times saying that the UK's official economic forecaster, the Office for Budget Responsibility, will later today publish revised forecasts showing the UK economy falling into recession in 2020 in the event that the country leaves the EU without a deal on October 31, which comes with the EU's chief Brexit negotiator, Barnier, saying that there will be no fresh negotiation of the Brexit withdrawal agreement while warning that the UK will have to "face the consequences" of a no-deal scenario. The net impact of all the above is weaker stock markets and a weaker Dollar. The narrow trade-weighted USD index is down by over 0.5% from the high seen on Tuesday. EUR-USD printed a two-day high at 1.1243 and USD-JPY a two-week low at 107.62.

    [EUR, USD]
    EUR-USD has been lifted by a turn lower in the Dollar, which has retraced about half the gains it saw during the first two days of the week. This put EUR-USD to a two-day high at 1.1243. A rekindling in expectations for the Fed to entertain an outsized 50 bp rate hike at the upcoming FOMC meeting, sparked by a WSJ report suggesting that trade negotiations between the U.S. and China are at a "standstill," has weighed on the U.S. currency. As for the Euro side of the equation, there remain reasons to be not-too-bullish, including the economic-slowing impact of Brexit-related uncertainty, which has been affecting activity on both sides of the channel. Upcoming ECB meetings, starting with the one next week, have shift to a "live" status, with the central bank considering a gear-shift to an explicit easing bias. At the moment, we take a neutral view of EUR-USD. The pair has trended lower from early 2018 through to March this year, but has since stabilized as the Fed shifted to a dovish bias. Support comes in at 1.1193-95.

    [USD, JPY]
    USD-JPY sank to a two-week low at 107.62. Further declines look likely, with the Dollar trending lower as markets reassess the chances for an outsized Fed easing following a WSJ report claiming that U.S. and China trade negotiations are at a "standstill". A turn lower in global stock markets also looks like it might sustain, given trade concerns and with Q2 corporate reports expected to show an earnings recession. Japanese trade data today also revealed a worse-than-expected 6.7% y/y contraction in exports, which have shrank for seven straight months now. There was also an unexpected rate cut, of 25 bp, by South Korea's central bank, which has had the effect of fanning rekindling speculation for the Fed to be more aggressive at the stimulus spigot. USD-JPY has resistance at 108.00-03. The June-25 low at 106.77 provides a downside waypoint.

    [GBP, USD]
    The Pound looks set to remain biased to underperform, on net, versus the other main currencies. Both the final two candidates to become the new Conservative Party leader favour a no-deal-if-necessary Brexit, with Boris Johnson looking more than likely to be crowned the new prime minister next Tuesday. News that Boris is considering proroguing Parliament (i.e. suspending the session) ahead of the October-31 Brexit deadline in a bid to block parliamentary members from stopping a no-deal Brexit has been been heaping bearish fuel on sterling's fire. The London Times, meanwhile, has reported that the UK's official economic forecaster, the Office for Budget Responsibility, will later today publish revised forecasts showing the UK economy falling into recession in 2020 in the event that the country leaves the EU without a deal on October 31, which comes with the EU's chief Brexit negotiator, Barnier, saying that there will be no fresh negotiation of the Brexit withdrawal agreement while warning that the UK will have to "face the consequences" of a no-deal scenario. Cable yesterday printed a fresh 27-month low at 1.2382, though has rebounded some amid a broader wave of Dollar underperformance.

    [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 has settled lower over the last day, returning to levels around 1.3050, leaving an eight-day high at 1.3093. The nine-month low seen last Friday is at 1.3018. A sharp drop in oil prices, with the WTI benchmark showing a near 6% decline from week-ago levels, on signs of easing tensions between the U.S. and Iran brough some pressure on the Canadian Dollar, which has held put a floor under USD-CAD, though broader declines in the U.S. buck have been diminishing the impact of this. We still judge USD-CAD to be amid a distinct bear trend that's been unfolding since late May, with the pair having declined in five of the last six weeks. Trend resistance comes in at 1.3071-73. The Fed's course to policy easing has been driving the downward bias. As for the BoC, the central bank maintained a neutral bias last week as it delivered the widely expected no change in the 1.75% rate setting. Officials did however emphasize that the trade and geopolitical backdrops are clouding the outlook. Policy remains data driven for the BoC, which will "pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation."

    Paste link in email or IM