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By XE Market Analysis March 20, 2018 4:26 am
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    XE Market Analysis: Europe - Mar 20, 2018

    The yen traded softer, while the dollar and most other currencies traded within their respective ranges from yesterday. EUR-USD settled in the lower-to-mid 1.2300s, below the three-session high that was logged yesterday at 1.2359 following reports that the ECB is shifting its focus to the rate path. USD-JPY lifted to a three-session high of 106.44, and EUR-JPY and other yen crosses have similarly lifted. Good yen selling was seen at the Tokyo fix, and the currency subsequently maintained a modest downside ebb. Asian stock markets have been mixed, with Japan's Nikkei closing 0.6% for the worse, but Chinese indexes and U.S. equity futures managing gains. AUD-USD saw only modest downside after the RBA minutes to the March meeting repeated that a rising currency would slow economic recovery and dampen inflationary pressures.

    [EUR, USD]
    EUR-USD has settled in the lower-to-mid 1.2300s, below the three-session high that was logged yesterday at 1.2359 following reports that the ECB is shifting its focus to the rate path. We advise fading EUR-USD gains on the back of yield differentials, which look likely to remain a negative for the pairing into and after this week's expected Fed rate hike. The Bund/T-note spread has widened below -228 bp, well out from -222 bp seen mid last week and another step closer to -235 bp historic wides. In the bigger view, EUR-USD 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. A daily close below 1.2275 would suggest momentum is shifting more assuredly to the downside..

    [USD, JPY]
    The yen has traded softer so far today. USD-JPY has lifted to a three-session high of 106.86, and EUR-JPY and other yen crosses have similarly lifted. Good yen selling was seen at the Tokyo fix (today is a "gotobi" day, date multiple of 5, which is netted out Japanese importers' demand for foreign currencies), and the currency subsequently maintained a modest downside ebb. Asian stock markets have been mixed, with Japan's Nikkei closing 0.6% for the worse, but Chinese indexes and U.S. equity futures managing gains. On the trade war front Chinese premier, Li, pledged that it will lower import tariffs and better protect intellectual property rights, and also noted that the WTO has already ruled against tariffs directed at itself. Japan's trade minister said that there was a "high possibility" that Japan would be exempted from the U.S. tariffs on steel and aluminium. Bloomberg reported a Japanese MoF official complaining that recent yen movements have been too volatile and trading too strongly. Japanese data today included the March Tankan business survey, which fell 1.0% m/m for large manufacturers while rising 2.0% for services.

    [GBP, USD]
    Cable rallied to a one-month high yesterday at 1.4088, since settling below 1.4050, still up about a big figure on Friday's closing levels. The CBI, a UK business lobby, summed up the market mood with its welcome of yesterday's EU and UK announcement of agreement on a 21-month Brixit transition deal, saying that it gives the "gift of time" and is a victory of "common sense." The agreement, announced in a joint press conference of the respective lead EU and UK negotiators, has lessened the odds for a no deal or "cliff edge" scenario. We anticipate sterling will establish a higher trading range versus its major counterparts, although there remains plenty of know unknowns, not least the politically thorny Northern Ireland border issue. Cable has support at 1.4007-10. UK inflation data is up today, where we expect a dip in the headline CPI rate to 2.8% y/y from 3.0% (median same).

    [USD, CHF]
    EUR-CHF broke higher and clocked a two-month high of 1.1749. The high was seen on the back of a media report that the ECB is shifting its focus to the rate path, which gave the euro a broad bid. The SNB last week announced unchanged policy following its quarterly policy review, 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, the governing political alliance led by La Lega has indicated that Italy will remain in the EU and retain the euro.

    [USD, CAD]
    USD-CAD has ebbed back some after yesterday posting a nine-month peak at 1.3155, which capped a run higher of six consecutive up sessions. Near-term consolidation support is at 1.3045-47. Reports that the NAFTA negotiation may be moving toward agreement gave the Canadian dollar some support, which came alongside a $2-plus rebound in oil prices over the last couple of trading days. Canada's week ahead brings the final inputs to the January GDP projection, with January wholesale trade (today), seen up 0.1%, January retail sales (Friday), seen rebounding 1.0% in January after the 0.8% drop in December. February CPI data is also up (Friday), expected to grow 0.3% m/m and by 1.8% y/y. USD-CAD technically remains in an overall uptrend, which has been in play since late January. Trend support comes in at 1.3028-30.

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