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By XE Market Analysis June 14, 2019 4:03 am
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    XE Market Analysis: Europe - Jun 14, 2019

    The Australian Dollar continued to weaken amid a backdrop of misfiring equity markets in Asia, led by a decline in the major Chinese indexes ahead of the release of Chinese production and retail sales data (due 07:00 GMT) that are expected to shine a fresh light on the deleterious impact that the trade spat with the U.S. is having. AUD-USD and AUD-JPY, both widely seen as liquid forex market proxies no China and broader risk appetite in global markets, printed respective three-week and four-month lows, at 0.6892 and 0.7465. USD-JPY, meanwhile, has been plying a narrow range around 108.30-35, holding above yesterday's one-week low at 108.16. EUR-USD has been similarly immobile, holding 1.1270-80, above the one-week low seen yesterday at 1.1268. The Dollar itself has been holding up well this week. The narrow trade-weighted USD index (DXY) is showing a net 0.5% gain at prevailing levels versus last Friday's close. This has come with Fed easing expectations having plateaued (Fed funds futures now fully discounting a 25 bp rate cut by the July FOMC), and with geopolitical tensions generating a degree of safe haven demand for the dollar.

    [EUR, USD]
    EUR-USD has been similarly immobile, holding 1.1270-80, above the one-week low seen yesterday at 1.1268. The Dollar itself has been holding up well this week. The narrow trade-weighted USD index (DXY) is showing a net 0.5% gain at prevailing levels versus last Friday's close. This has come with Fed easing expectations having plateaued (Fed funds futures now fully discounting a 25 bp rate cut by the July FOMC), and with geopolitical tensions generating a degree of safe haven demand for the dollar. As for the Euro, rising pressure on the ECB to entertain a further easing in monetary policy has put a cap on the currency. EUR-USD looks to be lacking strong directional impulse. Support comes in at 1.1268-70, and resistance at 1.1347-50.

    [USD, JPY]
    USD-JPY has been plying a narrow range around 108.30-35, holding above yesterday's one-week low at 108.16. AUD-JPY, widely seen as liquid forex market proxies on China, printed a fresh four-month low at 0.7465 amid a backdrop of misfiring equity markets in Asia, led by a decline in the major Chinese indexes ahead of the release of Chinese production and retail sales data, which are expected to shine a fresh light on the deleterious impact that the trade spat with the U.S. is having. We expect USD-JPY to remain downwardly bias, assuming U.S.-China trade tensions continue to simmer. Support is at 108-00-05, resistance at 108.79-73.

    [GBP, USD]
    The Pound has overall been trading relatively neutrally against the other major currencies this week, which follows about a five-week phase of underperformance. The Brexit process has essentially been frozen in motion as the Conservatives go about the business of selecting a new party leader/prime minister. Boris Johnson remains the strong favourite. Whoever it is, they should be installed by the end of July, little more than three months until the October 31 Brexit deadline. Given that there has been no sign that the EU will give any ground on the Northern Ireland backstop issue, the new PM will find themselves in exactly the same predicament/quagmire that consumed Theresa May -- trying to find a politically viable Brexit solution as the the head of a weak minority government in a deeply divided parliament, facing an uncompromising EU. If Boris, a notorious opportunist, is the new PM, then we can expect he would try and use the credible threat of leaving the EU without a deal in the hope of shifting Brussels out of its red lines. If this endeavour were to fail, which we assume it would, we think he would then call a general election in the hope of stealing the thunder of the newly formed Brexit Party (which dominated EU parliamentary elections in the UK), looking for clear a mandate both for his prime ministership and for a no-deal Brexit. This backdrop should maintain the pound's Brexit discount, which we estimate to have oscillated between 10 and 15% in trade-weighted terms since the vote to leave the EU in June 2016.

    [USD, CHF]
    EUR-CHF dropped back to the 1.1200 area from a two-week high at 1.1264. The drop back was driven by the Swiss Franc, which rallied in the wake of the SNB policy announcement yesterday. There didn't appear to be a specific catalyst, and the SNB's message was dovish, in fact, stating 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. The currency had weakened earlier in the week as market participants eyed the policy decision, so the price action looks to have been a buy-the-rumour-sell-the-fact type of reversal. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. Last week EUR-CHF hit a 23-month low at 1.1119. Assuming U.S.-led trade tensions continue, and assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a directionally downward bias. The SNB's -0.75% deposit rate and policy of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

    [USD, CAD]
    USD-CAD has remained buoyant, printing a fresh one-week high at 1.3346 to put in some more distance from the 11-week low seen last week at 1.3243. Softer oil prices, which are down by over 3.5% from week-ago levels, and by over 16% from levels seen a month ago, have impact a downward spin on the Canadian currency, even though the improvement in U.S.-Mexican relations bodes well for the new yet-to-be-Congressionally-ratified North American trade agreement. USD-CAD as support at 1.3305-10, and resistance at 1.3350.

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