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By XE Market Analysis March 21, 2019 4:40 am
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    XE Market Analysis: Europe - Mar 21, 2019

    The Dollar has tumbled after the Fed signalled there would be no further rate hikes this year and that it would halt the steady decline of its balance sheet in September. This drove U.S. yields lower, with the 10-year T-note retreating to levels below 2.53%, levels not seen since January 2018. The narrow trade-weighted USD index (DXY) concurrently dove by 0.7% to a six-week low at 95.75, while EUR-USD rallied by a similar magnitude in printing a six-week high at 1.1448, bumping up on the pair's 200-day moving average before settling to the lower 1.1400s. USD-JPY dove by 1% from pre-Fed announcement levels in posting a three-week low at 110.40. Aside from broader Dollar underperformance there has been a degree of Yen outperformance, which has seen EUR-JPY, for instance, ebb into three-day low terrain. Despite the Fed's reaffirmed dovish turn, stock markets have flagged somewhat, both on Wall Street and across Asian bourses today, where the main indices have been moderately mixed. This came after Trump said that he may leave tariffs on Chinese goods for a "substantial period" to ensure compliance a new trade deal, although a typically Trumpian "Art of the Deal" gesture (always being willing to walk away from a deal) ahead of new round of senior-level trade talks next week. Sterling has found its feet after falling yesterday amid the Brexit-caused political chaos in the UK, leaving the currency nursing an averaged decline of nearly 1% against the Dollar, Euro and Yen from week-ago levels.

    [EUR, USD]
    EUR-USD rallied about 0.7% in printing a six-week high at 1.1448, bumping up on the pair's 200-day moving average before settling to the lower 1.1400. The move was driven by Dollar weakness after the Fed signalled there would be no further rate hikes this year and that it would halt the steady decline of its balance sheet in September. This drove U.S. yields lower, with the 10-year T-note retreating to levels below 2.53%, levels not seen since January 2018. The narrow trade-weighted USD index (DXY) concurrently dove to a six-week low at 95.75. EUR-USD posted nine consecutive up days through to yesterday. The advance has flipped the pair back above the midway mark of the 1.1177-1.1570 range that's been seen since the start of the year. We don't envision much potential for the Euro to break above this range as the Eurozone economy has been losing momentum, with acute Brexit uncertainty taking a toll. EUR-USD has resistance at 1.1145-50, which encompasses both yesterday's high and the 200-day moving average.

    [USD, JPY]
    USD-JPY extended declines seen after the Fed signalled there would be no further rate hikes this year and that it would halt the steady decline of its balance sheet in September. This drove U.S. yields lower, with the 10-year T-note retreating to levels below 2.53%, levels not seen since January 2018. Despite this, stock markets have flagged somewhat, both on Wall Street and across Asian bourses today, where the main indices have been moderately mixed. This came after Trump said that he may leave tariffs on Chinese goods for a "substantial period" to ensure compliance a new trade deal, which typically Trumpian signal ahead of new round of senior-level trade talks next week. USD-JPY has tumbled by 1% from pre-Fed announcement levels in printing a three-week low at 110.40. Aside from broader dollar underperformance there has been a degree of yen outperformance, which has seen EUR-JPY, for instance, ebb into three-day low terrain. For now, we advise trend following with regard to USD-JPY. Resistance comes in at 100.78-80, which encompasses the 100-day moving average. The last time there was a daily closing below the 100-day moving average, in December, there was a near 5% decline in USD-JPY before the pair based out.

    [GBP, USD]
    Sterling has settled after turning sharply lower yesterday amid the Brexit-caused political chaos in the UK. A leaked paper that confirmed reports indicating that the EU would strongly oppose a long extension in the Brexit process. The BBC, among other media sources, had earlier reported that Brussels views Prime Minister May as having failed support a credible process that would allow parliament to find a cross-party solution after her own deal failed twice to win sufficient support to pass. This ups the ante in Westminster and breaks what had been a sanguine attitude in markets about the risk of a disorderly no-deal Brexit. As things presently stand the government is due to table an amendable motion in the House of Commons on Monday, and will attempt to hold a third vote on May's Brexit deal. With the EU unlikely to concede any further ground on the Irish backstop issue, it's hard to see that it would be permitted by the house speaker, who has demanded "substantial changes" before it cold be voted on again. It's possible that May sill persists by adding that the deal would be subject to a ratifying referendum, which the UK's attorney general has said would qualify as substantively different. We still expect a no-deal Brexit scenario will be avoided, though markets are right to be nervous. Our best guess is that there will be second referendum on EU membership, which will take place during a short extension of Brexit.

    [USD, CHF]
    EUR-CHF has drifted into the lower 1.1300s, despite EUR-USD's vault to six-week highs near 1.1450. The Swiss franc appears to have picked up safe haven demand with the Brexit process becoming swamped by political chaos in the UK. The cross has been seeing choppy directional impulses 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."

    [USD, CAD]
    USD-CAD has settled to around the 1.3300 level after some choppy trading over the last couple of days. We expect the direction bias to remain to the downside given the Fed's reaffirmed dovish push and with oil prices pushing to new trend highs. Front-month WTI crude futures today hit a fresh four-month high at $60.32, extending the year-to-date gain to over 32%, which, if sustained, is a boon for Canada's terms of trade. USD-CAD resistance comes in at 1.3358-60.

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