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By XE Market Analysis June 10, 2019 3:57 am
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    XE Market Analysis: Europe - Jun 10, 2019

    The Dollar has rallied across-the-board in the wake of news that the U.S. and Mexico have reached a deal on migration, which in turn has allayed investor concerns on trade. The 10-year U.S. T-note yield has spiked over 4 bp, which in turn has generated a rotation higher in the U.S. currency. The narrow trade-weighted USD index rallied by nearly 0.5% from Friday's 12-week low in making a high earlier at 97.85. EUR-USD concurrently receded to the lower 1.1300s after peaking at 1.1347 on Friday. Cable has pulled back to near 1.2700, over half a big figure down on Friday's highs, and USD-JPY has printed a 10-day peak at 108.67, aided by a concurrent theme of modest yen underperformance amid a backdrop of rallying stock markets in Asia. The Canadian Dollar has managed to hold its own against the U.S. buck, benefitting from the 2% rise in oil prices over the last week, and with the improvement in U.S.-Mexican relations boding well for the yet to be ratified North American trade agreement.

    [EUR, USD]
    EUR-USD dropped back to near 1.1300, reversing gains seen in the wake of Friday's much weaker than anticipated U.S. May jobs report, which exacerbated fears that slowing in manufacturing and capex on trade uncertainties are spilling over to the broad economy and the labor market. News that the U.S. and Mexico have reached a deal on migration has allayed investor concerns on trade, igniting a 4bp-plus spike in the 10-year U.S. T-note yield, which in turn has generated a rotation higher in the U.S. currency. The dynamic comes after EUR-USD posted a 1.5% rise on the week, which is the biggest weekly advance since August last year. EUR-USD has support at 1.1276-78, and resistance at 1.1347-50.

    [USD, JPY]
    USD-JPY has printed a 10-day peak at 108.67, underpinned predominantly by a rallying Dollar as markets digest the breakthrough in U.S.-Mexico relations and concurrent theme of modest yen underperformance amid a backdrop of rallying stock markets in Asia. USD-JPY has now breached above its prior-week peak for only the second time out of the last seven weeks. We expect the pair to continue to hold a better footing for now, especially with the planned meeting between U.S. Treasury Secretary Mnuchin and his Chinese counterpart at the G20 later in the month serving to arrest what had started seem an irrevocable downward spiral in relations between Washington and Beijing. USD-JPY has support 108.32-35, and resistance at 108.91-94.

    [GBP, USD]
    Cable has been buffeted by Friday's underwhelming U.S. jobs report and news of the breakthrough in U.S.-Mexican relations, with the former being bullish for Cable and the latter casting a bearish influence. Sterling saw a 17-day high at 1.2763 on Friday before tumbling back to near 1.2700 today. Last wee's release of May PMI data out of the UK painted a picture of an economy limping along at a marginal rate of expansion, with modest expansion in the dominant service sector offsetting contracting construction and manufacturing sectors. The focus in the UK is now squarely on the Conservative Party's leadership contest, which formerly commences today and will, by late July, have installed a new prime minister. Boris Johnson remains the favourite, who favours a hard, no-deal-if-necessary Brexit. This should limit the Sterling's recovery potential. After one month of underperformance, we expect the Pound will now establish a consolation range at the newly established lower levels as market participants, having priced-in richened odds for a no-deal scenario and a softened UK economic outlook, wait on substantive developments.

    [USD, CHF]
    EUR-CHF extended to a 10-day high at 1.1210 during pre-Europe trading in Asia, reflective of unwinding in safe-haven positioning amid U.S.-Mexico development and the recent burgeoning in central bank easing expectations. The gain put some further space in from the 23-month low that was printed at 1.1119 earlier in the week. The SNB's Alternate Governing Board Member Moser said recently that in his view "if we had higher interest rates then we would have a stronger exchange rate", which something the central bank is ever eager to prevent. The SNB continues to bank on the combination of a negative deposit rate and the threat of ad hoc currency intervention to keep the CHF under control, while trying to limit the impact of the negative rates on the domestic economy with the help of macroprudential instruments. Moser said that the risks in the Swiss real estate sector remain bearable, although he admitted that in the current environment these could increase.

    [USD, CAD]
    The Canadian Dollar has managed to more than hold its own against an otherwise outperforming U.S. currency, benefitting from the 2% rise in oil prices over the last week, and with the improvement in U.S.-Mexican relations boding well for the yet to be ratified North American trade agreement. USD-CAD, after diving quite sharply on Friday to an 11-week low at 1.3262 in what was the biggest weekly drop since February 22 and the biggest weekly drop since the last week of December, extended farther south today, posting a three-month low at 1.3243. Sub-forecast U.S. jobs data juxtaposed to sub-forecast Canadian jobs data was bearish catalyst on Friday. We expect follow-through selling of USD-CAD in the days ahead. The pair has resistance at 1.3303-05.

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