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By XE Market Analysis September 2, 2019 4:22 am
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    XE Market Analysis: Europe - Sep 02, 2019

    The dollar majors have been maintaining narrow ranges so far today in quiet early week, early month trading conditions against a backdrop of sputtering stock markets. PMI manufacturing data out of Asia painted a worrisome picture, overall. While the CAIXIN PMI for China came in above expectations in lifting to 50.4 from 49.9, orders remained weak and business confidence faltered. The official China manufacturing PMI was more underwhelming, too, falling back again, while the PMI data out of export-oriented South Korea, Japan and Taiwan all showed their respective manufacturing sectors to be in contraction, shining a light on the indirect impact of the U.S.-China trade war. This comes with additional U.S. tariffs being implemented on Chinese goods, as well as retaliatory levies from China. The State Council's financial stability and development committee in China attempted to calm the waters in restive markets, saying that it will maintain "reasonably ample" liquidity and "reasonable growth" in aggregate financing as it implements a prudent monetary policy. In currency markets, the narrow trade-weighted USD index, after rallying by a net 1.3% last week, was heading into the London interbank open at near net unchanged levels. The dollar last week benefited from improved risk conditions in global markets, which is generally read as taking the pressure off the Fed to ease aggressively.

    [EUR, USD]
    EUR-USD has settled to a narrow range below 1.1000 after declining for five consecutive days through to Friday. This left a 28-month low at 1.0963. Recent losses were mostly driven by a broad firming in the U.S. currency. The rekindling of risk appetite in global markets last week took the pressure off the Fed, which helped the currency. On the Euro's side of the scales, the ECB remains on course to increase monetary stimulus settings in September, while the risk of a no-deal Brexit, which has been amplified by the UK prime minister's controversial move to suspend parliament for five weeks from mid September to mid October, and which in the event would be detrimental to the Eurozone economy, is high on the "reasons to be concerned" side of the positional decision-making list of market participants. The no-deal Brexit risk was on the list of factors blamed for last week's record low in Hungarian forint. We retain a bearish view of EUR-USD. Resistance comes in at 1.1098-1.1000.

    [USD, JPY]
    USD-JPY edged a two-session low at 105.93, while EUR-JPY printed a 29-month low and AUD-JPY a 10-year low. The Yen subsequently ebbed back from its highs somewhat, but the overall dynamic reflected a richening in the Japanese currency's safe haven premium as global stock markets sputter. PMI manufacturing data out of Asia painted a worrisome picture, overall. While the CAIXIN PMI for China came in above expectations in lifting to 50.4 from 49.9, orders remained weak and business confidence faltered. The official China manufacturing PMI was more underwhelming, too, falling back again, while the PMI data out of export-oriented South Korea, Japan and Taiwan all showed their respective manufacturing sectors to be in contraction, shining a light on the indirect impact of the U.S.-China trade war. This comes with additional U.S. tariffs being implemented on Chinese goods, as well as retaliatory levies from China. We anticipate the Yen to retain an upside, safe haven driven bias in the coming weeks and months.

    [GBP, USD]
    Sterling faces a big week in the UK, with Parliament returning from summer recess tomorrow, and with opposition parties set on taking the no-deal Brexit option off the table, or at the least force Prime Minister Johnson to allow Parliament to vote on any new Brexit deal or on a no-deal itself. As weekend remarks from various opposition members of parliament affirmed, their favoured option is to pass legislation that would effectively ban no-deal by law. If they were to succeed, then the pound would likely rotate sharply higher for a burst, though follow-through would likely be curtailed as the prime minister would be certain in this circumstance to call a general election. Recent polling suggests that he could win in the UK's first past the post electoral system, especially if he formed a coalition with the Brexit Party, although with the electorate likely to view any election as a straight choice between voting for or against Brexit, the anti-Brexit alliance of opposition parties would present a potentially considerable force if they managed a highly disciplined strategy (entailing some parties withdrawing candidates in a range of seats so as not to split the anti-Brexit vote). The other option would be for the opposition to call a vote of no confidence in the government. This is less favoured by them than the legislative route as it could give Johnson, assuming that an interim government failed to form in a 14-day period following a successful no-confidence vote, the power to rig it so that the election would happened after Brexit had been triggered on October 31.

    [USD, CHF]
    EUR-CHF nudged back under 1.0900 after last week printing a 10-day high at 1.0923, which put in some added distance from the 25-month low seen on August 15 at 1.0835. A three-week range high at 1.0928 was left untroubled by last week's rise. While sentiment in global markets improved last week, there remains a skittish undertone as prospects for a thawing in U.S.-China relations seem limited. The Trump administration's agenda appears to be one of containment rather than the mere seeking of improved trading terms, while Beijing's insistence for the U.S. not to implement new tariffs has fallen on deaf ears (the latest tariff increases came into effect yesterday). The risk of a disorderly no-deal Brexit on October 31 is also a negative for the Euro. Overall, we retain a bearish view of EUR-CHF.

    [USD, CAD]
    USD-CAD has settled modestly lower after printing a 10-day high at 1.3333 on Friday, which was the culmination of a rebound from the two-week low seen last Tuesday at 1.3225. The pairing has been lacking clear direction over the last three weeks, which follows an ascending phase out of the 10-month low seen in mid July at 1.3109. The evolution of the Trumpian trade warring era and its impact on the global economy will continue to have directional influence on USD-CAD given the Canadian Dollar's standing as a commodity currency. USD-CAD has support at 1.3270-73.

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