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By XE Market Analysis June 24, 2019 3:45 am
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    XE Market Analysis: Europe - Jun 24, 2019

    Both the Dollar and Yen had been softening against most other currencies amid a cautious risk-on sentiment in global markets, underpinned by expectations for more policy accommodation by major central banks and a degree of relief that the U.S. and China have retuned to dialogue ahead of this week's G20 summit in Japan. Deepening U.S.-Iran tensions have been putting a cap on enthusiasm, however, and the MSCI Asia-Pacific index posted only modest gains and remained below the six-week high seen last Thursday. EUR-USD edged out a fresh three-month high, at 1.1389. Cable and AUD-USD also saw fresh highs, while USD-CAD declined, reversing most of the rebound-from-three-month-lows that was seen on Friday. USD-CAD's low is 1.3181. Aside from the general softer U.S. currency, the pairing was also guided lower by fresh oil price gains. USD-JPY plied a narrow rang in the low-to-mid 107.00s, while EUR-JPY, AUD-JPY, and most other Yen crosses, posted fresh highs. Gold prices remained buoyant, near Friday's six-year highs, with the metal proving a popular parking spot for investors amid a low yielding, conflict ridden world. Regarding the U.S. and China situation, while the return to dialogue is to be welcome, there remain concerns about the potential for a breakthrough anytime soon. Beijing today indicated that FedEx Corp is likely to be added to Beijing’s "unreliable entities list," while the U.S. Commerce Department said on Friday it was adding several Chinese companies to its national security "entity list."

    [EUR, USD]
    EUR-USD extended recent gains, posting a three-month high at 1.1389. This builds on gains seen last week following the more-dovish-than-expected Fed guidance and forecast-beating flash June Eurozone Composite PMI data. 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. Support comes in at 1.1347-50.

    [USD, JPY]
    USD-JPY plied a narrow rang in the low-to-mid 107.00s, while EUR-JPY, AUD-JPY, and most other Yen crosses, posted fresh highs. Gold prices remained buoyant, near Friday's six-year highs, with the metal proving a popular parking spot for investors amid a low yielding, conflict ridden world. Regarding the U.S. and China situation, while the return to dialogue is to be welcome, there remain concerns about the potential for a breakthrough anytime soon. Beijing today indicated that FedEx Corp is likely to be added to Beijing’s "unreliable entities list," while the U.S. Commerce Department said on Friday it was adding several Chinese companies to its national security "entity list." Assuming that the U.S and China continue to struggle to find a resolution, we would expect USD-JPY to be directionally bias to the downside.

    [GBP, USD]
    The Pound has stabilized after a phase of underperformance since early May. Markets have over this time discounted the delayed Brexit deadline, the success of the Brexit Party at the UK's EU parliamentary elections, the resignation of former the prime minister, Theresa May, and the likelihood that she will be replaced by an arch Brexiteer, specifically Boris Johnson, who takes a no-deal-if-necessary Brexit view. Focus will remain on the Conservative Party election process this week. The new prime minister should take up the reins by mid July, leaving just over three months until the October 31 Brexit. The economic consequences of the prolonged uncertainty has been increasingly evident, and the BoE last week trimmed its Q2 GDP growth estimate to 0.0% q/q from 0.2% while stating that inflation remains well anchored, although still retained guidance for gradual tightening over the three-year forecast horizon (which assumes a smooth and orderly Brexit process). 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 while the no-deal-Brexit-if-necessary Boris Johnson continues to look the prime minister in waiting. Cable has resistance at 1.2758-60.

    [USD, CHF]
    EUR-CHF has found a footing after coming under signifiant pressure last week, in the wake of ECB President Draghi's eyebrow raising dovish shift, which has been the most notable of a growing chorus of dovish voices on the central bank's governing council. The cross printed a 23-month low at 1.1057 before recouping to the lower 1.1100s. The advance of the Franc against the Euro will doubtlessly 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 this 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 declined, reversing most of the rebound-from-three-month-lows that was seen on Friday. The low is 1.3181. Aside from the general softer U.S. currency, the pairing was also guided lower by fresh oil price gains. Sharp oil price movements tend to impact the Canadian Dollar given its potential impact on Canada's terms of trade. Given the Fed's dovish turn, and assuming that U.S.-Iran tensions remain elevated, we would expect USD-CAD to remain heavy. Resistance comes in at 1.3240-45.

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