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By XE Market Analysis June 25, 2019 4:16 am
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    XE Market Analysis: Europe - Jun 25, 2019

    The Dollar hit fresh lows against the Euro and Yen, among other currencies, with the Treasury market having continued to price in Fed easing. Fed funds futures are fully pricing-in a 25 bp rate cut at the late July FOMC, and are factoring about 40% odds for a 50 bp move then. The market is also fulling discounting just over three 25 bp rate cuts by year end, and 100 bp worth of easing by mid-2020. Against this backdrop the USD index (DXY) earlier carved out a new three-month low, at 95.85, in what is now the fifth consecutive day of declines. EUR-USD concurrently edged out a fresh three-month high at 1.1412. USD-JPY posted a new near-six-month-low at 106.77, while AUD-USD hit a two-week peak at 0.6972. Cable lifted back above 1.2760 but has so far left yesterday's one-month peak at 1.2766 unchallenged. USD-CAD remained heavy, but above the four-month lows seen last week. The safe-haven yen outperformed amid the weak-dollar environment, with stock markets in Asia and U.S. index futures coming under pressures. A Bloomberg report suggested that President Trump has been considering ending the postwar defence pact with Japan, while market narratives are mostly expressing a circumspect view of the potential for a breakthrough in U.S.-China relations at the upcoming G20 summit.

    [EUR, USD]
    EUR-USD edged out a fresh three-month high at 1.1412, lifted by broader weakness in the U.S. currency as Treasury markets continue to factor in Fed rate cuts. Fed funds futures are fully pricing-in a 25 bp rate cut at the late July FOMC, and are factoring about 40% odds for a 50 bp move then. The market is also fulling discounting just over three 25 bp rate cuts by year end, and 100 bp worth of easing by mid-2020. The dollar still has potential to revert as a safe-haven currency should the geopolitical backdrop deteriorate, which is a risk (re U.S. vs Iran and U.S. vs China), though for now the shift in yield differentials is the dominant factor driving market positioning. Another potential, indirect, support for the Dollar against the Euro is the counterbalance of expectations for ECB easing, although with Bund yields having long since gone negative there is greater scope for Treasury yields to narrow the gap. 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 posted a new near-six-month-low at 106.77 while the safe-haven yen outperformed amid the weak-dollar environment, with stock markets in Asia and U.S. index futures coming under pressures. A Bloomberg report suggested that President Trump has been considering ending the postwar defence pact with Japan, while market narratives are mostly expressing a circumspect view of the potential for a breakthrough in U.S.-China relations at the upcoming G20 summit. Assuming that the U.S and China continue to struggle to find a resolution, and assuming U.S.-Iran tensions continue to simmer, we would expect USD-JPY, and more especially AUD-JPY, to return to a downward trajectory. Last week's five-month low at 73.92 provides a downside waypoint with regard to AUD-JPY.

    [GBP, USD]
    Cable posted a fresh one-month high at 1.2784, floating upward by a generally weak Dollar. The Pound has concurrently managed to recoup some of the ground lost to the Euro and Yen yesterday. The economic consequences of the prolonged Brexit and political uncertainty in the UK have 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 1.2800-05.

    [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 levels around 1.1100. 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 has become entrenched in a consolidation of recent sharp losses, seen last week from levels above 1.3400 amid a cocktail of ratcheting Fed easing expectations and a strong rally in oil prices. The pair printed a four-month low at 1.3151 last Thursday, since settling to an orbit of the 1.3200 level. The pair is presently showing a year-to-date decline of 3.3%. We advise trend following, anticipating further downside progress, assuming that both the Fed remains on its dovish course and that U.S.-Iran tensions remain elevated, which should in turn keep oil prices underpinned. USD-CAD has resistance at 1.3240-45.

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