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By XE Market Analysis May 29, 2019 5:12 am
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    XE Market Analysis: Europe - May 29, 2019

    The Dollar and Yen had traded firmer amid a risk-off theme in global markets. USD-JPY fell to a two-week low at 109.15, despite concurrent dollar gains versus most other currencies. EUR-JPY hit a fresh four-month low, and AUD-JPY has come under notable pressure. The narrow trade-weighted USD index, meanwhile, carved out a six-day high at 97.98, while EUR-USD fell to a six-day low at 1.1158, returning last week's two-year low at 1.1107 back into scope. Trade and geopolitical concerns continue to erode investor confidence, while the risk of a no-deal Brexit eventuality and concerns about budget responsibility of the populist Italian government are also on the worry list. Against this backdrop, the U.S. 3-month/10-year yield differential has inverted once again, which is seen as a historically reliable prognosticator of recession. Sterling has come under fresh pressure against the outperforming Dollar and Yen, though has been holding up better against other currencies so far today. Cable edged out a five-day low at 1.2650.

    [EUR, USD]
    EUR-USD fell to a six-day low at 1.1158, returning last week's two-year low at 1.1107 back into scope. Safe haven demand for Dollars has been driving the latest leg lower. We view EUR-USD as remaining in a bear trend which has been evolving since early 2018. This was reaffirmed by the new trend lows of last week. Resistance comes in at 1.1215-18.

    [USD, JPY]
    The Yen had traded firmer amid a risk-off theme in global markets. USD-JPY fell to a two-week low at 109.15, despite concurrent dollar gains versus most other currencies. EUR-JPY hit a fresh four-month low, and AUD-JPY has come under notable pressure. Trade and geopolitical concerns continue to erode investor confidence, while the risk of a no-deal Brexit eventuality and concerns about budget responsibility of the populist Italian government are also on the worry list. Against this backdrop, the U.S. 3-month/10-year yield differential has inverted once again, which is seen as a historically reliable prognosticator of recession. 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 109.05-08, and resistance at 109.57-60.

    [GBP, USD]
    Sterling has come under fresh pressure against the outperforming dollar and yen, though has been holding up better against other currencies so far today. Cable edged out a five-day low at 1.2650. The UK currency is likely to remain vulnerable as the success at EU parliamentary elections of the Brexit Party, which favours a hard, no-deal-if-necessary Brexit, will strengthen the odds for the Conservative Party to opt for a candidate with strong Brexit-supporting credentials to become the new party leader, and thereby the new prime minister. The results of the EU Parliament elections in the UK underscored the sharp polarisation in views about Brexit between the leave-without-a-deal option on the on hand, and remain-in-the-EU on the other. While the Brexit and UKIP parties took 35% of the vote (the vast majority of which being accounted for by the former), the anti-Brexit parties -- those in favour of calling another referendum -- collectively took about 40% of the vote.

    [USD, CHF]
    EUR-CHF has steadied after dropping precipitously by the norms of this cross over the last two weeks in a move that had been driven by outperformance in the Franc as global asset markets sputtered amid the entrenching trade war between the U.S. and China. The cross printed a seven-week low last Thursday at 1.1206, since recouping to around the 1.1250 mark. The punitive -0.75% overnight deposit rate is evidently not sufficient to deter the Swiss currency from still being seen as a safe haven. The SNB's Alternate Governing Board Member Moser said recently that in his view "if we had higher interest rates then we would have a stronger exchange rate", which something the central bank is ever 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.

    [USD, CAD]
    USD-CAD has lifted back above 1.3500, swinging the five-month high seen in late April at 1.3521 back into range. The move has been concomitant with a rekindling risk-off theme in global markets, which has seen the U.S. dollar's safe haven premium richen while weighing on crude prices. We remain bullish of USD-CAD on the assumption that the global economy is set for rocky patch and associated risk for a sustained correction in oil prices. The pair is presently challenging recent range highs in the 1.3493-1.3521 zone, which collectively mark a key resistance zone. Support comes in at 1.3450-53. The BoC's monthly review of monetary policy is widely expected to be a non-event for markets. No change to the current 1.75% rate setting is anticipated, with the central bank firmly in wait-and-see mode amid a recovering economy on the one hand, and geopolitical uncertainty on the other.

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