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By XE Market Analysis June 19, 2019 3:39 am
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    XE Market Analysis: Europe - Jun 19, 2019

    Narrow ranges have been prevailing among the main currencies, despite Wall Street closing strongly higher, the MSCI Asia-Pacific index hitting five-week highs, the 10-year Bund yield hitting a record low, and a the 10-year U.S. note yield printing a its lowest closing level in 21 months. USD-JPY has drifted moderately lower, to levels around 108.35 after scaling intraday highs just above 108.60 earlier in Tokyo trading. The dip reflects a pick up in demand for the Yen, which has also seen EUR-JPY and AUD-JPY drift back from intraday highs. EUR-USD, meanwhile, has remained within a 15 pip range so far today, centred on 1.1195, holding above the 16-day low seen yesterday at 1.1161, which was the product the eyebrow-raising dovish about-turn of ECB's Draghi yesterday. Cable edged out a rebound high of 1.2569, putting in a little distance from the five-month low printed yesterday at 1.2506. AUD-USD similarly lifted out of trend lows, earlier seeing a peak of 0.6885, which is 44 pips up on yesterday's five-month trough. The Canadian Dollar, buoyed by a 4.5%-plus rally in oil prices over the last day, has seen some moderate outperformance, which has taken USD-CAD to a three-session low at 1.3365. Underpinning oil prices (aside from Mideast geopolitics) and equity markets have been hopes for a strongly dovish signal from the Fed today, yesterday's dovish shift by the ECB chief, and news that President Trump will be meeting with President Xi at the upcoming G20, and that ministerial-level trade negotiations will be recommencing.

    [EUR, USD]
    EUR-USD has remained within a 15 pip range so far today (as of the early London AM session), centred on 1.1195, holding above the 16-day low seen yesterday at 1.1161. The low was the product the eyebrow-raising dovish about-turn of ECB's Draghi yesterday. A record low yield in the 10-year Bund yield should keep the Euro a sell-on-rallies trade, despite concurrent declines in U.S. yields and associated expectations for the Fed to cut rates as soon as the late-July FOMC. EUR-USD's tumble over the last day took out support at 1.1200-02, while the decline so far this week has reversed over thee quarters of last week's gain, which was the biggest weekly advance the pairing has seen since August last year. Last week's low is at 1.1160. Bigger picture, EUR-USD has been in a bear trend since early 2018, though downside momentum has abated markedly in recent months, with the pairing looking to have found a rough equilibrium.

    [USD, JPY]
    USD-JPY has drifted moderately lower, to levels around 108.35 after scaling intraday highs just above 108.60 earlier in Tokyo trading. The dip reflects a pick up in demand for the Yen, which has also seen EUR-JPY and AUD-JPY drift back from intraday highs. Overall, directional impulse has been limited in forex markets with participants hunkered down ahead of the Fed policy announcement later on Wednesday. The U.S. 10-year yield posted the lowest close yesterday since September 2017 at 2.016% amid anticipation for the Fed to signal a rate cut as soon as the FOMC in late July. Wall Street closed solidly higher, too, while the MSCI Asia-Pacific (ex-Japan) index rallied by over 1.5% in printing a five-week high earlier. The dovish about-turn by ECB's Draghi yesterday has been in the mix of sentiment drivers, as has news that President Trump will be meeting with President Xi at the upcoming G20, and that ministerial-level trade negotiations will be recommencing. All eyes will be on the Fed, where there is risk of disappointment given the level of expectation for a strong dovish guidance. USD-JPY is presently sitting near the midway of a choppy sideways range that's been unfolding for nearly three weeks now. The range over this time has been 107.81 - 108.80. Support comes in at 108.00-06.

    [GBP, USD]
    Yesterday produced another five-month low for Cable, this time at 1.2506. The latest down phase was a led by EUR-USD and dollar outperformance overspill, with the pound holding up better against the euro and rebounding from lows against the yen. The Conservative Party's leadership contest is down to the final several, with Boris Johnson looking more likely than ever to win, and so become the new prime minister. He favours a "managed Brexit", though in reality -- assuming that the EU won't budge on its red lines even in the face of a credible threat of the UK walking away without a deal -- the risk has risen for the UK leaving the EU without an agreement on divorcing terms or an outline for a future trading relationship, which would rule out a transitionary phase and would see the nation adopt trading on WTO terms at midnight on October 31. UK May inflation data are due today. We expect headline CPI to dip to 2.0% y/y from 2.1% y/y in April (median same), an outcome which would fit with BoE projections. Core CPI is also seen ebbing a little, to 1.7% y/y from 1.8% (median same). The BoE's Monetary Policy Committee begins its June meeting today, announcing tomorrow, where no changes are widely anticipated in both actual policy and guidance. The Brexit process, meanwhile, remains on ice as the the Conservative Party's leadership contest ensues. We estimate that the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and don't see much scope of this reversing anytime soon. Cale has resistance at 1.2600-05.

    [USD, CHF]
    EUR-CHF dropped back to the 1.1200 area after last week scaling a three-week high at 1.1264. The rotation lower was driven by the Swiss Franc, which rallied in the wake of the SNB policy announcement last Thursday. There didn't appear to be a specific catalyst, and the SNB's message was in fact dovish, 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 last 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. UR-CHF posted a 23-month low at 1.1119 earlier in the month. 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]
    The Canadian Dollar, buoyed by a 4.5%-plus rally in oil prices over the last day, has seen some moderate outperformance, which has taken USD-CAD to a three-session low at 1.3365. Underpinning oil prices have been Mideast geopolitics, hopes for a strongly dovish signal from the Fed today, yesterday's dovish shift by the ECB chief, and news that President Trump will be meeting with President Xi at the upcoming G20, and that ministerial-level trade negotiations will be recommencing. This is a bullish mix of developments for currency's with higher beta characteristics, such as the Canadian buck. USD-CAD has support at 1.3350.

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