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By XE Market Analysis May 23, 2019 3:33 am
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    XE Market Analysis: Europe - May 23, 2019

    The main currencies have traded with limited directional bias, on net, so far today. The FOMC minutes weren't perhaps quite as dovish as some market participants were anticipating, which inspired a modest rise in the dollar. The minutes showed that "many" believe downside risks had abated, and that low inflation was likely "transitory," though "several" worried that low inflation expectations could become anchored. EUR-USD edged out a two-day low at 1.1143. The Yen saw a bout of strength in the wake of the Tokyo fixing, though gains have largely unravelled. USD-JPY printed an intraday low at 110.12 before recouping to near net unchanged levels above 110.30. Yesterday's low at 110.06 has remained untroubled so far. Risk appetite in global markets waned. The MSCI Asia-Pacific (ex-Japan) equity index fell nearly 1% in posting a four-month low. U.S. Treasury Secretary Mnuchin said that proposed tariffs on a further $300 bln worth of Chinese imports could be a month away once the impact on U.S. consumers had been studied. The progression from tariffs to direct actions against individual Chinese companies and their supply chains has widely been seen as marking significant rise in the stakes, and many narratives are talking about the trade dispute as transmogrifying into an all-out technology cold war. Two U.S. Navy ships reportedly passed through the Taiwan Strait, which if true would be greeted as an antagonizing move by Beijing. A negative headline reading in Japan's flash May manufacturing PMI also evidenced the impact of the trade war, with Japan's economy being particularly exposed to the crossfire. Sterling looks set on falling to new trend lows today. UK Prime Minister May's revamped Brexit proposal has fully backfired, and her resignation is now widely anticipated (likely on Friday).

    [EUR, USD]
    EUR-USD edged out a two-day low at 1.1143. FOMC minutes weren't perhaps quite as dovish as some market participants were anticipating, which inspired a modest rise in the dollar. The minutes showed that "many" believe downside risks had abated, and that low inflation was likely "transitory," though "several" worried that low inflation expectations could become anchored. We view EUR-USD as remaining in a bear trend which has been evolving since early 2018. The pair had been in a rebound phase during the first half of May after posting trend lows in both March and April. Resistance comes in at 1.1200-05.

    [USD, JPY]
    The Yen saw a bout of strength in the wake of the Tokyo fixing, though gains have largely unravelled. USD-JPY printed an intraday low at 110.12 before recouping to near net unchanged levels above 110.30. Yesterday's low at 110.06 has remained untroubled so far. Risk appetite in global markets waned. The MSCI Asia-Pacific (ex-Japan) equity index fell nearly 1% in posting a four-month low. U.S. Treasury Secretary Mnuchin said that proposed tariffs on a further $300 bln worth of Chinese imports could be a month away once the impact on U.S. consumers had been studied. The progression from tariffs to direct actions against individual Chinese companies and their supply chains has widely been seen as marking significant rise in the stakes, and many narratives are talking about the trade dispute as transmogrifying into an all-out technology cold war. Two U.S. Navy ships reportedly passed through the Taiwan Strait, which if true would be greeted as an antagonizing move by Beijing. A negative headline reading in Japan's flash May manufacturing PMI also evidenced the impact of the trade war, with Japan's economy being particularly exposed to the crossfire. Assuming that the U.S.-China trade war both deepens and persists, as is starting to look likely, this would likely set the Yen up for bouts of outperformance in the weeks and months ahead. USD-JPY has support at 110.05-08, and resistance at 110.80-82.

    [GBP, USD]
    Sterling looks set on falling to new trend lows today. UK Prime Minister May's revamped Brexit proposal has fully backfired, and her resignation is now widely anticipated (likely on Friday). May's days numbered, while the possibility for a new general election has risen substantially, as have the chances for a no-deal Brexit scenario. The bottom line is that the middle ground for Brexit, that is a "soft" version of leaving the EU (severing political ties while remaining economically tethered via continued membership of the single market and/or customs union), looks to have fallen away with the debate polarizing around a hard no-deal-exit-if-necessary Brexit on the one hand, and a remain-in-EU on the other. This week's parliamentary EU election, which take place from today through to Sunday, will in the UK essentially be a proxy vote on EU membership. A strong showing by the new Brexit Party would likely see the odds for a no-deal Brexit ratchet up further, while a strong showing by pro-remain parties, which include the the Liberal Democrats, the newly established ChangeUK Party, and the Scottish National Party, would likely have the converse effect. We continue to advise trend following with regard to Cable, for now. The pair has resistance at 1.2710-12.

    [USD, CHF]
    EUR-CHF yesterday posted a six-week low at 1.1239. The cross has now corrected over half of the gains seen during the pronounced rally that was seen in April. The SNB's Alternate Governing Board Member Moser said last week that in his view "if we had higher interest rates then we would have a stronger exchange rate", something the central bank is eager to prevent. The SNB continues to bank on the combination of a negative deposit rate and the threat of ad hoc currency intervention to keep the CHF under control, while trying to limit the impact of the negative rates on the domestic economy with the help of macroprudential instruments. Moser said so far the risks in the Swiss real estate sector remain bearable, although he admitted that in the current environment these could increase. EUR-CHF has resistance at 1.1320-23.

    [USD, CAD]
    USD-CAD has sprung back above 1.3450 from yesterday' one-month at 1.3357. The low was seen after the release of above-forecast retail sales data out of Canada, but the losses turned into a buying opportunity as oil prices continued a recent sharp correction and with the release of FOMC minutes wrong-footing some market participants who had been looking for more dovish takeaways. The minutes showed that "many" believe downside risks had abated, and that low inflation was likely "transitory," though "several" worried that low inflation expectations could become anchored. We retain a bullish view of the pairing, anticipating that a worsening U.S.-China trade war will be negative for the Canadian buck and its Dollar-bloc brethren. USD-CAD range highs at 1.3493-1.3521 mark a key resistance zone.

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