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By XE Market Analysis October 19, 2017 3:37 am
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    XE Market Analysis: Europe - Oct 19, 2017

    The yen continued to underperform, coming amid fresh highs on Wall Street. USD-JPY clocked a two-week high at 113.14, while EUR-JPY, AUD-JPY, and other yen crosses, also scaled to new highs. Strong trade data out of Japan had little impact on the yen. Outside the case for USD-JPY, and NZD-USD, which dove by over 1% ahead of an announcement following post-election coalition negotiations, the dollar has traded generally softer, giving back some of the gains seen during the first half of the week. EUR-USD climbed to a three-day high of 1.1815. AUD-USD and Cable saw similar price actions, while USD-CAD ebbed to a four-session low, at 1.2452. Geopolitics, Brexit, incoming economic data and the associated evolution in tighter monetary policy disputations, will remain central focal points for market participants.

    [EUR, USD]
    EUR-USD climbed to a three-day high of 1.1815, and EUR-JPY scaled to a three-week peak at 122.62. The euro also logged a one-month high versus the Swiss franc and a one-week high in the cast against the pound. Madrid's clampdown on Catalonia's independence movement appears, at least for now, and at least from the perspective of participants in forex markets, to have mollified concerns of political instability in Spain, though there is a real risk that the heavy-handed response will only intensify the secessionist movement. With regard to EUR-USD, markets also alert to the Trump administration's upcoming decision on who will lead the Fed over the next term, with the five candidates ranging from dovish Yellen, the present chair of the central bank, to the decidedly hawkish Taylor. Trump is expected to announce his choice by November 3. Incoming U.S. data has been, and we expect will continue, to keep expectations for a 25 bp hike in the funds rate in December alive, although there remains little signs as yet that the diminishing slack in the labour market is translating to high price pressures. Former trend resistance at 1.1785-87 now reverts as a support.

    [USD, JPY]
    The yen continued to underperform, coming amid fresh highs on Wall Street. USD-JPY clocked a two-week high at 113.14, while EUR-JPY, AUD-JPY, and other yen crosses, also scaled to new highs. Strong trade data out of Japan had little impact on the yen. We anticipate further USD-JPY gains on the assumption that geopolitical tensions don't flare and cause a yen-supportive risk-off trade in global markets. Former highs and resistance at 112.39-40 and 112.48 now mark support.

    [GBP, USD]
    The pound is showing a moderate loss of 0.3%, on average, versus the dollar, euro and yen on the week so far (as of London opening levels on Thursday). This reverses some of the gains the currency saw last week. The ONS stats office highlighted this week that inflation-adjusted household incomes are down 0.4% from a year ago in the ex-bonus measure, despite employment growth remaining strong, and job vacancies up 3k in Q2 at a near record level 783k. The evident weakness in wage bargaining power despite strong employment levels has been something of a mystery, though plausible reasons include the evolution of the gig economy and competition to labour from automation. With the Brexiting process starting to look messy, with consequential impact on business investment, and with the political scene in Westminster looking shaky, we retain a big-picture bearish view of the pound, seeing scope for a new sub-1.3000 range developing in the weeks ahead.

    [USD, CHF]
    EUR-CHF lifted to a one-month high of 1.1585. Former EUR-CHF resistance at 1.1488-90 proved a good support earlier in the week. We have been anticipating an eventual return to 1.2000, which is the former trading floor of the SNB's, though this assumes that political tensions (Catalonia in particular) don't worsen, as the franc tends to find demand amid news developments that might be threating to the political integrity of the Eurozone.

    [USD, CAD]
    USD-CAD is down for a second day, making a one-week low of 1.2451. We expect the overall bias will remain to the upside, with the Fed still seen on track to hike the Fed funds rate by 25 bp in December, and with BoC policymakers having actively dispelled any notion that it is on a committed tightening path. The BoC's quarterly business survey, released earlier in the week, showed economic activity to be remaining robust in a state of moderation following a strong performance over the summer period. USD-CAD has support at 1.2432.

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