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By XE Market Analysis March 20, 2019 4:09 am
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    XE Market Analysis: Europe - Mar 20, 2019

    The Dollar has been trading steady-to-firmer so far today. EUR-USD has been holding below the two-week high seen yesterday at 1.1361, and USD-JPY lifted to a two-day high at 111.69. AUD-USD took a spill, concurrently with a 4%-plus tumble in iron ore prices (sparked by news of the reopening of a major mining operation in Brazil); iron ore being the biggest Australian export. The pair printed a three-session low at 0.7056, which was the culmination of a 50 pip decline from Tuesday's closing levels. EUR-JPY ascended to a two-week peak, at 126.74, and other yen crosses, outside the case for AUD-JPY, have also been buoyant amid Japanese currency underperformance. Sterling has been holding up, belying the state of constitutional crisis in the UK and associated Brexit uncertainty just eight days before the legally mandated day of departure from the EU. Although moderately softer over the last couple of sessions, the UK currency is still showing about a 1.7% averaged gain versus the dollar, euro and yen from month-ago levels, and a gain of about 5% on the year-to-date. Markets are remaining sanguine to the risk for a no-deal scenario, although the risk of this cannot be ruled out. We still think no-deal will be avoided. While May has been using the threat of no-deal for political leverage, we don't that she -- who voted to remain in the EU in 2016 -- would allow it to happen, even if she has to revoke Article 50 to stop Brexit. The Fed announcement on policy later today is also on the radar screen amid expectations for trimmed inflation forecasts and lower dot plots.

    [EUR, USD]
    EUR-USD has remained buoyant, near the two-week high seen yesterday at 1.1361. The dollar continues to trade with an underlying softening bias amid expectations for the Fed to trim inflation forecasts and lower dot plots at this week's FOMC meeting, which concludes later today. This follows last week's surprising benign inflation data out of the U.S., along with the data showing the second straight month of decline in manufacturing. There's been no real fear of the FOMC since January's dovish pivot, and the markets hope for more confirmation. We suspect the markets might be overly optimistic in terms of the dots, with Fed funds futures showing no further hikes and, indeed, a cut as the next move. We doubt the FOMC would make such a big jump in the outlook; remember at the December meeting the median dot showed two tightenings this year and another next year. Going from three to zero, with little change in the growth or inflation outlooks, seems like too large a step. If we're right, the dollar would have potential to rally against the Euro and most other currencies. EUR-USD has resistance at 1.1370-75, which encompasses the 100-day moving average.

    [USD, JPY]
    USD-JPY lifted to a two-day high at 111.69 while EUR-JPY ascended to a two-week peak, at 126.74. Other yen crosses have also been buoyant, with the Japanese currency having been underperformed. One notable exception has been AUD-JPY, which dipped amid underperformance in the Australian dollar, which was seen concurrently with a 4%-plus tumble in iron ore prices (sparked by news of the reopening of a major mining operation in Brazil). Stock markets have mostly traded softer in Asia, which has seen the MSCI Asia-Pacific (ex-Japan) index pull back from six-month highs, although the softer yen has given Japanese exporter stocks a boost, which has seen the Nikkei 225 index post modest gains. Markets have gone into pre-event risk mode ahead of the Fed's policy announcement today, having priced in a reaffirmation of the central bank's January dovish turn. There has been reports that China is pushing back against some U.S. demands in trade negotiations. U.S. Trade Representative Lighthizer and Treasury Secretary Mnuchin are due to travel to Beijing next week for the next round of high level talks, and most pundits are seeing scope for compromise with both sides eager to avoid prolonged economic damage that the dispute has evidently being causing.

    [GBP, USD]
    Sterling has been holding up, belying the state of constitutional crisis in the UK. Although moderately softer over the last couple of sessions, the UK currency is still showing about 1.7% averaged gain versus the dollar, euro and yen from month-ago levels, and a gain of about 5% on the year-to-date. The move by the House of Commons speaker to rule out a third vote on the prime minister's Withdrawal Agreement, unless re-submitted in a motion with substantive changes, has thrown a spanner into an already chaotic Brexit process. A joint statement from the president of the EU council and the Irish PM said they are waiting for proposals from London ahead of the EU leaders' summit on Thursday. Prime Minister May is expected to ask of a delay, and is reportedly considering both a short and long delay. A cabinet meeting yesterday was reportedly tense and fractious, and most members were strongly against the idea of a long, two-year extension to Brexit. Germany's Merkel said that she could not say how the EU would respond to a delay request as too much is in flux. A second referendum is on the cards. A YouGov poll, published on Monday, highlighted a surge in public support for a another referendum, with 48% supporting vs 36% against. Just 12% believe that Parliament will be able to solve Brexit. When faced between the choice of a "soft" Brexit, leaving without a deal or remaining in the EU, only 13% supported the soft option, while 34% favoured no-deal and 40% preferred remaining. Markets are presently sanguine to the risk for a no-deal scenario, although the risk of this cannot be ruled out. We think no-deal will be avoided. While May has been using the threat of no-deal for political leverage, we don't that she -- who voted to remain in the EU in 2016 -- would allow it to happen, even if she has to revoke Article 50 to stop Brexit.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.1300s, holding below the two-week high seen last week at 1.1385. The cross has continued on a relatively choppy path, the latest phase of which have been the current rebound after sharp Euro declines following the ECB's lending move earlier in the month. The cross has been seeing relatively high volatility since the start of the year, often times characterized by bouts of pronounced underperformance in the Swiss franc that have often been accompanied by talk/suspicions of SNB intervention. SNB vice president, Zurbruegg, said recently that the franc "remains highly valued" and the situation on foreign currency markets is "still fragile" and that the SNB's two pillar strategy of negative interest rates and ad-hoc currency interventions, or threat thereof, "remains appropriate."priate."

    [USD, CAD]
    USD-CAD recouped to a two-day high of 1.3345 after the sharp-but-brief dive yesterday to 1.3250. The low had been a product of stop-loss selling and speculative buying of Canada's currency as oil prices vaulted to fresh trend highs. Front-month WTI crude futures surged to a fresh four-month high shy of $60.0, extending the year-to-date gain to over 31%, which, if sustained, is a boon for Canada's terms of trade. USD-CAD is now trading near flat from week-ago levels, but remains down by 2.2% on the year-to-date. We expect the overall directional bias to remain to the downside. Resistance comes in at 1.3358-60.

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