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By XE Market Analysis October 23, 2018 4:02 am
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    XE Market Analysis: Europe - Oct 23, 2018

    Both the Dollar and Yen have outperformed amid a risk-off backdrop, with the Japanese currency itself outperforming its U.S. counterpart on safe haven demand, which has pushed USD-JPY lower despite gains in the greenback against most other currencies. USD-JPY has dipped to an intraday low of 112.41 after closing in New York yesterday at 112.79-80. EUR-JPY has lost over 0.5% while the biggest mover out of the Dollar pairings and associated cross rates we track has been AUD-JPY, which has shed 0.7%. The USD index (DXY) has traded 0.2% higher, posting a high of 96.15, which is 1 pip shy of the two-month high seen October 9. EUR-USD concurrently printed a two-session low at 1.1439, which is 6 pips shy of last week's two-month low. Chinese stock markets turned sharply lower, despite the efforts by Beijing to shore up investor sentiment in recent session. The MSCI Asia-Pacific (ex-Japan) index has lost over 1.5%, while Japan's Nikkei 225 closed 2.7% for the worse and China's SSE index is showing a 2.6% decline, with losses having accelerated in post-lunch trading. Investors are facing a wall of worry: incoming Q3 corporate earnings, while upbeat in the headlines so far, on net, have been highlighting the impact of a slowing Chinese economy, while the uncertainties generated by the Eurosceptic political movement in Europe, and Saudi Arabia's diplomatic isolation are also on the worry wall list.

    [EUR, USD]
    EUR-USD printed a two-session low at 1.1439, which is 6 pips shy of last week's two-month low, on the back of a generally firmer U.S. currency as risk aversion in global market ratcheted up. Uncertainties being generated by the Eurosceptic political movement in Europe are on the worry list of investors, while U.S. fundamentals (Fed tightening) remain a positive, although there is conjecture that should the Democrats do well in the upcoming midterm elections in the U.S., this would erode Trump administration's tax cutting and deregulation agenda. We advise trend following for EUR-USD. Resistance comes in at 1.1496-98, and support at 1.1393-95.

    [USD, JPY]
    The Japanese currency has outperformed on safe haven demand, with stock markets in Asia and U.S. equity futures turning sharply lower. The MSCI Asia-Pacific (ex-Japan) index has lost over 1.5%, while Japan's Nikkei 225 closed 2.7% for the worse and China's SSE index is showing a 2.6% decline, with losses having accelerated in post-lunch trading. Investors are facing a wall of worry: incoming Q3 corporate earnings, while upbeat in the headlines so far, on net, have been highlighting the impact of a slowing Chinese economy, while the uncertainties generated by the Eurosceptic political movement in Europe, and Saudi Arabia's diplomatic isolation are also on the worry wall list. USD-JPY dipped to an intraday low of 112.41 after closing in New York yesterday at 112.79-80. EUR-JPY has lost over 0.5% while the biggest mover out of the Dollar pairings and associated cross rates we track has been AUD-JPY, which has shed 0.7%. While fundamentals (yield differentials and the associated contrast between Fed and BoJ policy paths) remain supportive for USD-JPY, the periodic spectre of risk aversion has been an intermittent offsetting bearish force. USD-JPY has resistance is at 113.07-10.

    [GBP, USD]
    The Pound remained under pressure, and is nursing an average week-on-week loss of more than 1.5% to the Dollar, Euro and Yen. Cable printed a near three-week low of 1.2937, extending losses seen from yesterday's high at 1.3090. Prime Minister May hit back against growing calls in her Conservative Party for a no confidence vote, by detailing before parliament the progress she has made with negotiating on Brexit, claiming a deal is 95% of the way there. The problem is that the 5% unresolved part is the most intractable issue of all: the Irish border problem. Even if the May faces a no confidence vote and survives (which, in the event, would be likely), and even if May's government reaches a deal with the EU on the Irish border backstop plan, it would remain highly uncertain whether there would be sufficient support for it in a parliamentary vote, such is the extent of division within the governing Conservative-EUP alliance and the Labour Party. This raises the risk for there being a no-deal Brexit, although we think parliament won't let this happen and instead turn the issue back to the voters with another referendum or general election. Cable has resistance at 1.3000-05.

    [USD, CHF]
    EUR-CHF dropped back toward 1.1400 from levels above 1.1500 over the last day, tracking EUR-USD lower and with the jury still out on the Eurosceptic government in Italy. EUR-CHF has support at 1.1400.

    [USD, CAD]
    USD-CAD has settled below 1.3100 after rallying on Friday to a six-week high of 1.3132 following the cooler Canada CPI numbers, and a weak retail sales outcome. Despite the softer data, we still expect the BoC to hike rates this week. The announcement, Monetary Policy Report and press conference are due Wednesday. The BoC is expected to announce a 25 bp rise in rates to 1.75% as the economy runs near potential and underlying inflation holds around the 2% target. We have pencilled in three to four more 25 bp rate hikes next year. The realization of our October projection would leave three 25 basis point rate hikes in 2018 (we expect no change at the December announcement) after the two 25 basis point increases in 2017. A 25 basis point move once a quarter during 2019 still qualifies as gradual in our view, but would be a sign of a bank that is growing increasingly confident in its outlook for the growth and inflation path. USD-CAD has resistance at 1.3132-35.

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