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By XE Market Analysis October 19, 2018 3:56 am
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    XE Market Analysis: Europe - Oct 19, 2018

    The Dollar has held firm against most currencies during the Asian session, into the open of the London interbank market, although slightly off highs seen during the New York afternoon yesterday. EUR-USD found a footing above 1.1450 after posting a 10-day low at 1.1449. Cable also steadied after seeing an eight-day low at 1.3015. USD-JPY has traded firmer, as have EUR-JPY and other Yen crosses. This saw the Japanese currency unwind gains seen during the New York PM session yesterday, when the currency had found safe haven demand as Wall Street came under pressure following corporate earnings misses, which drove the S&P 500 and Nasdaq to respective closing losses of 1.4% and 2.1%. Subsequent to this, S&P 500 futures have rebounded by 0.5% in overnight trading, while Chinese indexes have rallied by over 2% following concerted verbal interventions by Chinese authorities (China's Statistics bureau said economic fundamentals are sound, the Banking and Insurance Regulatory Commission declared systemic risks to be under control while the PBoC governor stated that market valuations are at low levels). The PB0C also set the USD-CNY reference rate higher, at 6.9387 after 6.9275 yesterday. All this helped offset misses in China Q3 GDP, which came in at 6.5%, below the median forecast for 6.6%, and production. The rally in China helped lift the mood across Asian bourses, although Japan and others still posted losses. This backdrop helped the Yen decline. USD-JPY recouped to the 112.50-52 area in Tokyo after seeing a four-day low in New York at 111.94.

    [EUR, USD]
    EUR-USD found a footing above 1.1450 after posting a 10-day low at 1.1449. The pair has been in a broadly sideways chop for nearly a month now, though we still place greater odds for there being a sustained move to the downside than for a sustain move to the upside. A key level on the downside is 1.1430-35. While the Dollar is benefiting from the Fed's tightening course, the Euro side of the coin is plagued by signs of economic slowdown (witness the unusually large drop in the German ZEW investor sentiment survey for October and recent weakness in manufacturing data) and concerns about the rise in Eurosceptic political parties in Italy, Germany and elsewhere. Brexit has also come in to sharp focus, which is a potential negative for the common currency given the seemingly insuperable problem that the Irish border is presenting. EUR-USD has resistance at 1.1534-35.

    [USD, JPY]
    USD-JPY has traded firmer, as have EUR-JPY and other Yen crosses. This saw the Japanese currency unwind gains seen during the New York PM session yesterday, when the currency had found safe haven demand as Wall Street came under pressure following some corporate earnings misses, which drove the S&P 500 and Nasdaq to respective closing losses of 1.4% and 2.1%. Subsequent to this, S&P 500 futures have rebounded by 0.5% in overnight trading, while Chinese indexes have rallied by over 2% following concerted verbal interventions by Chinese authorities (China's Statistics bureau said economic fundamentals are sound, the Banking and Insurance Regulatory Commission declared systemic risks to be under control while the PBoC governor stated that market valuations are at low levels). The PB0C also set the USD-CNY reference rate higher, at 6.9387 after 6.9275 yesterday. All this helped offset misses in China Q3 GDP, which came in at 6.5%, below the median forecast for 6.6%, and production. The rally in China helped lift the mood across Asian bourses, although Japan and others still posted losses. This backdrop helped the Yen decline. USD-JPY recouped to the 112.50-52 area in Tokyo after seeing a four-day low in New York at 111.94. Fundamentals (yield differentials and the associated contrast between Fed and BoJ policy paths) remain supportive for USD-JPY, but the spectre of risk aversion has been an offsetting bearish force. USD-JPY has resistance is at 113.07-10.

    [GBP, USD]
    Cable has posted a two-week low at 1.3015. Against the euro, the pound is trading near the halfway mark of the range that's been seen over the last week or so. Market participants are taking a sanguine view of the risk of a no-deal Brexit, although the risk of a cliff-edge departure seems more tangible after the EU-27 cancelled the special summit for Brexit that had been earmarked for mid November. We continue to expect that the UK's parliament will ultimately stop a no-deal scenario of happening (which might in the end take a new referendum or a general election), while the EU's offer of an extended transition period, which will be granted once a deal is struck, has helped allay concerns after this week's Brussels summit, once heralded as a make-or-break threshold, came and went in Groundhog-Day manner. Prime Minister May looks to be snared in what has been called the "hard Brexit trap", which is how to solve the politically imperative problem of preserving a free-flowing border between Ireland and Northern Ireland while exiting both the EU's customs union and single market. Cable has support at 1.3039-43 (which encompasses both the 50- and 100-day moving averages).

    [USD, CHF]
    EUR-CHF has tracked EUR-USD lower, making an eight-day low at 1.1399, putting the cross nearly a big figure down from the two-month high that was seen last week at 1.1492. The cross has resistance at 1.1445.

    [USD, CAD]
    USD-CAD printed a near six-week high at 1.3089. The high has been a product of broader strength in the U.S. Dollar along with a 4%-plus dive in oil prices this week, which has weighted on the Canadian currency. Canada releases September CPI today, which is seen rising 0.1% on a month comparable basis after the 0.1% rise in August. Annual CPI growth is projected to slow to a 2.7% y/y pace in September from 2.8% in August and the lofty 3.0% growth rate in July, adding further support to the Bank's view that the run-up in CPI through July was due to temporary factors that are now unwinding. August retail sales (Friday) are expected to improve 0.6% after the 0.3% gain in July. Overall, the data should be supportive for the Canadian currency. We expect the BoC to hike 25 bp at the October 24 announcement and have pencilled in three to four 25 bp rate hikes in 2019.

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