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By XE Market Analysis March 16, 2018 4:22 am
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    XE Market Analysis: Europe - Mar 16, 2018

    The yen has maintained a firming bias amid a mixture of geopolitical news and fresh drama at the White House in the U.S.. USD-JPY dipped back under 106.00, while EUR-JPY and other yen cross have also been trading with a heavy tone. News that Trump has removed his national security advisor, H.R. McMaster, has been a worry for some on the view that it might mean Trump will become more hawkish on foreign policy. Some market narratives also pin some of the yen's gains on news that U.S. special council Mueller has subpoenaed the Trump Organisation for business documents, some of which are related to Russia. Investors are additionally trying to fathom the risk of a Trumpian trade war, how extensive it might and what consequences it might have on global growth. The joint response to Russia by key NATO allies following the attempted hit on an ex Russian double agent is also in the mix. This backdrop has fed a mixed path in global equity markets. We see greater risks for USD-JPY declining to 100.00 than climbing to 110.00. Elsewhere, EUR-USD recouped above 1.2300 after dipping yesterday to a four-day low at 1.2295. AUD-USD hit a 10-day low at 0.7770 before recouping to 0.7800.

    [EUR, USD]
    EUR-USD recouped above 1.2300 after dipping yesterday to a four-day low at 1.2295. This extended a decline from levels just above 1.2400. Market participants are fathoming a bout of political news, including the latest reshuffle at the White House (Trump is removing national security advisor, H.R. McMaster, and we don't yet know who will be the replacement) and news that U.S. special council Mueller has subpoenaed the Trump Organisation for business documents, some of which are related to Russia. Investors are additionally trying to fathom the risk of a Trumpian trade war. In the bigger view of EUR-USD, the pair remains mired at midway levels of a range that's been seen since late January, which marks a consolidative phase after rallying out of sub-1.1600 levels that were seen last November. More of the same looks likely for now. Support is at 1.2275.

    [USD, JPY]
    USD-JPY dipped back under 106.00 with the yen retaining a firming bias. EUR-JPY and other yen cross have also been trading with a heavy tone. News that U.S. special council Mueller has subpoenaed the Trump Organisation for business, some of which are related to Russia, has been a worry for investors, helping prop safe haven demand for the Japanese currency. There is also news that Trump has removed his national security advisor, H.R. McMaster. A backdrop of mixed global equity markets has been a supporting driver of the yen, with investors trying to fathom the risk of a Trumpian trade war, how extensive it might and what consequences it might have on global growth. The joint response to Russia by key NATO allies following the attempted hit on an ex Russian double agent is also in the mix. We see greater risks for USD-JPY declining to 100.00 than climbing to 110.00 on the assumption that we'll see more equity market turmoil as markets digest trade wars, and should this prove to be less vicious than feared, then the removal of crisis-era monetary stimulus by the Fed, BoJ and other key global central banks. USD-JPY has near-term support at 105.58-60.

    [GBP, USD]
    Sterling is trading neutrally, and is likely to remain so into next week's EU leaders' summit, which will focus the 27 on agreeing a roadmap for a post-Brexit trading relationship with the UK. The latest edition of the Barclay's survey of investors showed that most investors are now expecting significant delays in the trading negotiation process beyond March 2019, and most don't anticipate that a deal for a transition period won't been made until October this year. On the UK economy, the consensus view has remained steady over the last three months, with inflation seen slightly higher over the medium term. Most investors expect the BoE to hike rates in the second half of the year, though in the wake of the February BoE Inflation Report more have shifted to May as being the time for a second-in-the-cycle tightening. Sterling markets are presently pricing in about 80% odds for there being a 25 bp hike in the repo rate in May, and fully discounting a hike by August. Cable is presently near net unchanged on the day, at 1.3951 bid, and the pair is trading near the midway point of a choppy sideways range that's been persisting since late January.

    [USD, CHF]
    EUR-CHF has settled in a narrow-ranged consolidation near the 1.1700 level following the early-March break higher from sub-1.1500 levels. A seven-week high was logged last Thursday at 1.1741. The SNB yesterday announced unchanged policy, as had been widely anticipated, while reaffirming its commitment to monetary stimulus to keep what it still considers a richly-valued currency on a back foot. EUR-CHF rallied some 10% from mid last year, has been emblematic of the euro's recovery over the last year, with the franc unwinding latent safe haven premium as existential uncertainties under the Eurozone and EU come off the boil. Even though Eurosceptic parties won about 50% of the vote in Italy's recent general election, there forming political alliance, led by La Lega, has said Italy will remain in the EU and retain the euro.

    [USD, CAD]
    USD-CAD steamed to a nine-month high at 1.3072, extending the run higher from sub-1.2250 levels that were seen in early February. The Canadian dollar has been underperforming amid worries about the NAFTA negotiation and after BoC Governor Poloz said on Tuesday that the unwinding of monetary stimulus would "remain cautious." Oil prices have also been trading on the softer side. We also anticipate upcoming Canadian data will be consistent with the BoC's slow-go approach to policy normalization. Manufacturing shipments, up today, are expected to fall 1.0% in January (m/m, sa) after the 0.3% dip in December, with our projection driven by the 2.1% tumble in export values revealed in the January trade report. USD-CAD technically remains in an uptrend, which has been in play since late January. Trend support comes in at 1.2975.

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