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By XE Market Analysis October 20, 2017 3:39 am
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    XE Market Analysis: Europe - Oct 20, 2017

    The dollar has rallied across the board, up 0.3% versus the euro and by 0.6% against the yen, following news that the U.S. Senate had passed a budget blueprint that will help push forward the Republican party's planned $1.5 tln tax cut. The news came after the close of Wall Street, and sparked a rally in U.S. equity index futures while lifting bourses across the Asia-Pacific region. USD-JPY rallied to a two-week high of 113.30, gaining over 60 pips from the pre-news levels. EUR-USD tumbled to a 1.1804 low from levels just above 1.1850. The relative underperformance of the yen, which is typical during bursts of risk-on sentiment in global markets, saw EUR-JPY and other yen crosses climb, as the dollar post gains versus the euro and most other currencies. Market participants will monitor the budget's passage in the House. The budget, if passed, will open the door to expanding the federal deficit by $1.5 tln over 10 years, which will pay for the tax cut. This won't be pleasing to fiscal conservatives in the House. Rand Paul was the only Republican to vote against in the Senate vote, and while there may be more opposition from House Republicans, the desire for a political has fostered a change in priorities. We advise buying the dollar.

    [EUR, USD]
    EUR-USD tumbled to a 1.1804 low from levels just above 1.1850. The move reflected dollar buying after the U.S. Senate passed a budget blueprint that will help push forward the Republican party's planned $1.5 tln tax cut. Despite the decline in EUR-USD, the EUR-JPY cross still managed to lift as the yen underperformed, with the cross managing to post a four-week high at 133.85. Markets will now be focusing on the passage of the budget in the House, and Trump's pending choice of who will take the helm of the Fed for the next term, The five candidates under consideration for the Fed job range from the 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 kis now marked as a support.

    [USD, JPY]
    USD-JPY rallied to a two-week high of 113.30, gaining over 60 pips after news broke that the U.S. Senate had passed a budget blueprint that will help push forward the Republican party's planned $1.5 tln tax cut. The news came after the close of Wall Street, by sparked at rally in U.S. equity index futures while lifting bourses across the Asia-Pacific region. The dollar was bid across the board, though USD-JPY outperformed, with the yen seeing its typical underperformance during risk-on bouts in global markets. EUR-JPY and other yen crosses advanced as a consequence, even as the dollar gained on the euro and most other currencies. We have been and continue to advocate a bullish view of USD-JPY, although on the proviso that geopolitical tensions don't flare up and cause a yen-supportive risk-off trade in global markets. Support is at 112.77-80.

    [GBP, USD]
    Cable clocked an 11-day low at 1.3088 before finding a footing. It's been a bearish week for the pound, which has come under pressure versus the dollar and euro, among other currencies. There may some scope for a rebound today should the speculative market, which is running a net short exposure, cover positions ahead of the weekend. Bigger picture, we retain a bearish view of the Queen's currency. There has been a palpable rise in the risks that the UK may leave the EU without a new trading deal having been made given the evident deadlock in negotiations, while there is also political risk in Britain, with the ruling Tory party in both a fragile and warring state.
    Sterling to a knock follow a sub-forecast UK retail sales data and with a group of hardline Brexiteers in the ruling Tory party haven written to PM May exacting that the government should walk away from negotiations if the EU continues to refuse to talk about trade. Cable logged a five-session low at 1.3120 and EUR-GBP scaled to a five-session high of 0.8989. UK retail sales for September underwhelmed, contracting by 0.8% m/m, well off the median forecast for a modest 0.1% decline. The August figure was revised down to 0.9% m/m growth from 1.0%. The y/y comparison came in with 1.2% growth after 2.3% y/y in August, and was much weaker than the median forecast for 2.1%. Core sales, ex fuel, showed similar weakness, declining 0.7% m/m versus the median for -0.2%.

    [USD, CHF]
    EUR-CHF has corrected some after logging a 33-month high at 1.1629, with the cross settling back around 1.1575. 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 rallied back above 1.2500 with the U.S. dollar encountering demand after the Senate passed a budget that marks a significant step for the Republicans $1.5 tln tax cut plan. 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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