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By XE Market Analysis June 11, 2019 2:58 am
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    XE Market Analysis: Europe - Jun 11, 2019

    The Dollar has settled to a consolidation of the gains seen yesterday against most other currencies, which were seen as the 10-year Treasury yield rose over 6 bp following the deal on immigration struck between the U.S. and Mexico. EUR-USD has been maintaining a narrow range in the lower 1.1300s after rotating lower from Friday's 12-week high at 1.1347. Cable has settled near the 1.2680 mark, down from the three-week high seen on Friday at 1.2763. USD-JPY lifted by over 30 pips in the hours after the Tokyo fixing today. EUR-JPY and other yen crosses saw a similar price action as the Japanese currency lost ground as the relief rally on easing trade tensions in equity markets continued. USD-JPY printed an intraday high at 108.64, but has so far remained shy of yesterday's 11-day peak at 108.71. Despite President Trump threatening to hit China with fresh tariffs should he fail to make progress with President XI at the G20 later in the month, Chinese markets led gains across Asian equity bourses, with the CSI 300 index showing a 2.4% gain as of the late PM session. Helping underpin were remarks from Beijing that local governments would be able to tap funds raised from special bonds to use in major investment projects. Elsewhere, AUD-USD dipped to an eight-day low at 0.6947. USD-CAD has consolidated in the mid 1.3200s, above the 11-week low yesterday at 1.3243. Focus today will fall on the release of U.S. PPI data, ahead of CPI figures tomorrow. We are expecting benign data, with the headline PPI figure seen slowing to 1.9% y/y from 2.2%. Anything softer than markets expect could further encourage Fed easing expectations.

    [EUR, USD]
    EUR-USD has been maintaining a narrow range in the lower 1.1300s after rotating lower from Friday's 12-week high at 1.1347. Recent dynamics have reflected Dollar volatility, which first dove in the wake of Friday's 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 labor market, before rallying back on news that the U.S. and Mexico have reached a deal on migration, which allayed investor concerns on trade and igniting a 6bp-odd spike in the 10-year U.S. T-note yield. This comes after EUR-USD posted a 1.5% rise last week, the biggest weekly advance since August last year. The pair now looks stuck without strong directional impulse. U.S. inflation figures this week are the biggest market moving risk this week, along with retail sales at the end of the week. We estimate Wednesday's release of CPI to come in with a 0.1% May gain in the headline reading with a 0.2% increase in core prices, following respective April readings of 0.3% and 0.1%. This would translate to a headline y/y gain of 1.9%, down from 2.0% in April, which should maintain Fed easing expectations. EUR-USD has support at 1.1276-78, and resistance at 1.1347-50.

    [USD, JPY]
    USD-JPY lifted by over 30 pips in the hours after the Tokyo fixing today. EUR-JPY and other yen crosses saw a similar price action as the Japanese currency lost ground as the relief rally on easing trade tensions in equity markets continued. USD-JPY printed an intraday high at 108.64, but has so far remained shy of yesterday's 11-day peak at 108.71. Despite President Trump threatening to hit China with fresh tariffs should he fail to make progress with President XI at the G20 later in the month, Chinese markets led gains across Asian equity bourses, with the CSI 300 index showing a 2.4% gain as of the late PM session. Helping underpin were remarks from Beijing that local governments would be able to tap funds raised from special bonds to use in major investment projects. Japan's Nikkei 225 gained a relatively modest 0.3%. USD-JPY has this week 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 top-level U.S. and Chinese officials at the upcoming G20 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]
    Sterling took a wallop yesterday following the big miss in April GDP and production data out of the UK. Cable printed a low at 1.2653, which is the lowest level seen since last Tuesday. The Pound also printed a fresh five-month low against the Euro in what is now the sixth consecutive week the UK currency has breached its prior-week low versus the common currency. April GDP contracted 0.4% m/m, the biggest monthly decline since March 2016, while April manufacturing fell by a 3.9% m/m rate -- the biggest contraction since June 2002. The data build an increasing sense of gloom about an economy being afflicted by prolonged political and associated Brexit uncertainty, coupled with a slowing economies in continental Europe. The Pound looks like it will remain firmly on the out-of-favour list of overlay and reserve managers, especially with arch Brexiteer Boris Johnson favourite to become the new prime minister. "BoJo" is running his campaign on a hard, no-deal-if-necessary Brexit, which would see the UK adopt less favourable WTO trading terms after exiting the EU. Cable has resistance at 1.2691-93, and support at 1.2637-40

    [USD, CHF]
    EUR-CHF extended to a 11-day high at 1.1211, reflective of unwinding in safe-haven positioning following U.S.-Mexico developments 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]
    USD-CAD has consolidated in the mid 1.3200s, above the 11-week low yesterday at 1.3243. The Canadian Dollar has managed to more than hold its own against the outperformance of U.S. currency over the last day, 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 dove sharply on Friday to an 11-week low at 1.3262 in what was the biggest dialy drop since February 22, and the biggest weekly drop since the last week of December, before extending further south yesterday, 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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