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By XE Market Analysis March 23, 2018 5:00 am
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    XE Market Analysis: Europe - Mar 23, 2018

    The yen remained underpinned as risk aversion continued to course through global markets on the realizing threat of Trumpian trade wars. USD-JPY logged a 16-month low at 104.64. Japanese inflation data today may have given the yen an added bid, with the BoJ-watched core CPI reading rising to a rate of 1.0% y/y in February from 0.9% in the month prior, although the rate is still well off the central bank's 2% target. AUD-JPY has the biggest loser out of the main dollar pairings and cross rates over the last day, reflecting part Aussie underperformance and part yen outperformance, a pattern often observed during phases of heightened risk aversion in global markets. The cross has declined by some 9% since early-January. While Australia won an exemption from Trump's steel and aluminium tariffs, the country will be exposed to U.S. tariffs via Trump's action against China, which is the antipodean country's biggest client for its vast natural resource exports, and more broadly to any global tit-for-tat trade way. Elsewhere, EUR-USD has settled back in the mid-to-lower 1.23s after yesterday's short-lived foray under 1.2300.

    [EUR, USD]
    EUR-USD is moderately higher on the week but has been lacking strong directional bias amid the evolving backdrop of risk aversion in global markets. The Fed's rate hike was well anticipated, while its guidance was a tad less hawkish than most expected. The countdown to when the ECB will commit to ending its QE program continues. In the bigger view, EUR-USD has settled near the midway levels of a consolidation range that's been seen for nearly two months now, which follows a 14-month rally phase from sub-1.0500 levels. We anticipate more of the same for now. Support comes in at 1.2282-84, and resistance at 1.2367-70.

    [USD, JPY]
    USD-JPY has declined for a second on continue yen outperformance as risk aversion courses through global markets on the realizing threat of a Trumpian global trade war. The pair logged a 16-month low at 104.64. Japanese inflation data today may have given the yen an added bid, with the BoJ-watched core CPI reading rising to a rate of 1.0% y/y in February from 0.9% in the month prior, although the rate is still well off the central bank's 2% target. AUD-JPY has the biggest loser out of the main dollar pairings and cross rates over the last day, reflecting part Aussie underperformance and part yen outperformance, a pattern often observed during phases of heightened risk aversion in global markets. The cross is widely considered a forex market risk appetite barometer for this reason, and has declined by some 9% since early-January levels. While Australia won an exemption from Trump's steel and aluminium tariffs, the country will be exposed to U.S. tariffs via Trump's action against China, which is the antipodean country's biggest client for its vast natural resource exports, and more broadly to any global tit-for-tat trade way. The minutes from the RBA's early-March board meeting showed there was some concern about a deterioration in Australia's terms of trade.

    [GBP, USD]
    Sterling dropped back to net lower levels versus those seen just ahead of the BoE announcement yesterday. Cable clocked a low of 1.4076 before settling near 1.4100 after seeing a post-BoE high at 1.4222. EUR-GBP saw an inverse price action, dipping to a 0.8668 low, which is a new nine-month nadir, before rebounding above 0.8700. The pound initially rallied on the BoE announcement (which left the repo rate at 0.5% and QE totals unchanged, as had been widely expected) on news that two of the seven MPC members voted for a 25 bp rate hike. The median forecast had been for a unanimous 9-0 vote for unchanged rate. The minutes showed the dissenters noting low spare capacity and accelerating wage growth, though a closer look showed some more circumspect views on the Committee, with net trade and business investment noted as areas of weakness, and with Brexit-related uncertainty on households and businesses continuing to receive a special mention. We see Cable as being in process of establishing a range in the low 1.4000s, after rising from early-March levels near 1.3700.

    [USD, CHF]
    EUR-CHF settled back to the upper 1.1600s after breaking to a two-month high of 1.1749 earlier in the week. The high was seen on Tuesday following 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 steadied today near 1.2900 after declining for four consecutive sessions, leaving a 10-day low yesterday at 1.2829. The down move reflected gains in the Canadian dollar on news of progress on the NAFTA front, with the U.S. dropping its contentious auto-content proposal. Former consolidation support at 1.3045-47 has now reverted as a resistance level. A $5-odd rebound in oil prices over the last week has also been a positive lead for the Loonie. Next data of note out of Canada will be January retail sales (today), seen rebounding 1.0% in January after the 0.8% drop in December, along with February CPI (also today), which we expect to rise 0.3% m/m and by 1.8% y/y.

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