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By XE Market Analysis June 27, 2019 3:18 am
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    XE Market Analysis: Europe - Jun 27, 2019

    The Yen continued to weaken as forex and Asian stock markets opted for risk-on positioning ahead of the G20 summit, betting for some progress between the U.S. and China despite justifiable reasons to be wary, given the recent history for disappointment. AUD-JPY has been the biggest mover out of the main dollar pairings and associated cross rates, rising about 0.5% in printing a 16-day high at 75.62. USD-JPY posted an eight-day high at 108.13. This price action came as Chinese markets led broader gains across Asian stock markets, which propelled the MSCI Asia-Pacific index up by 0.6%, while S&P 500 futures rose by 0.4%. Elsewhere, EUR-USD drifted modestly lower, to the the 1.1350 area, where the pairing has been gravitating to for over a day now. Cable also dipped moderately, to the 1.2675-80 area, while EUR-GBP consolidated near 0.8950-60, just off the five-month high seen yesterday at 0.8976. USD-CAD was also in a consolidative mood after yesterday carving out a four-month low at 1.3107, today settling fractionally higher, around 1.3130-35. Oil prices have also come off highs, after rallying strongly yesterday.

    [EUR, USD]
    EUR-USD drifted modestly lower, to the the 1.1350 area, where the pairing has been gravitating to for over a day now after rotating lower on the Fed's walk back of its dovish guidance, leaving Tuesday's three-month peak at 1.1412. For now, dynamics in yield differentials looks likely to remain the dominant factor driving directional impulses, though 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). 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 further than for Bund yields to drive a further widening. 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 1.1344-47.

    [USD, JPY]
    The Yen continued to weaken as forex and Asian stock markets opted for risk-on positioning ahead of the G20 summit, betting for some progress between the U.S. and China despite justifiable reasons to be wary, given the recent history for disappointment. AUD-JPY has been the biggest mover out of the main dollar pairings and associated cross rates, rising about 0.5% in printing a 16-day high at 75.62. USD-JPY posted an eight-day high at 108.13. This price action came as Chinese markets led broader gains across Asian stock markets, which propelled the MSCI Asia-Pacific index up by 0.6%, while S&P 500 futures rose by 0.4%. 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.

    [GBP, USD]
    Sterling has returned to underperforming ways, posting a five-month low against the Euro yesterday while printing a four-day low against the Dollar. The price action, coming after a multi-week phase of underperformance as markets discounted the expected economic consequences of the prolonged Brexit and political uncertainty in the UK, suggests that there remains a demand-supply imbalance. Reserve and overlay managers remain underweight of the UK currency, awaiting concrete developments on the Brexit front. BoE Governor Carney remarked during parliamentary testimony earlier that market expectations for a no-deal Brexit scenario have risen by a "notable" degree, while his colleague Saunders said that the Brexit deadlines, as seen with the original March-29 one and the new October-31 one, produces an incentive for businesses and households to defer spending. The BoE last week trimmed its Q2 GDP growth estimate to 0.0% q/q from 0.2% We estimate that sterling 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.

    [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 been consolidative mood after yesterday carving out a four-month low at 1.3107, today settling fractionally higher, around 1.3130-35. Oil prices have also come off highs, after rallying strongly yesterday. The new low reaffirmed the bear tend that's been unfolding since early May. We advise trend following, anticipating further downside progress on the assumption that both the Fed remains on its overall dovish course and that U.S.-Iran tensions remain elevated, which should in turn keep oil prices underpinned. USD-CAD has resistance at 1.3205-08.

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