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By XE Market Analysis September 4, 2019 3:55 am
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    XE Market Analysis: Europe - Sep 04, 2019

    A risk-back-on sentiment has weighed on the Yen and underpinned the Australian Dollar, with the AUD-JPY cross consequently heading into the London interbank open with gains of over 0.5%. USD-JPY lifted to around 106.20-25 from sub-106.00 levels, while AUD-USD rallied to a nine-day peak at 0.6783. The Aussie, being a liquid currency proxy on China, attracted demand following above-forecast Caixin China services and composite PMI survey readings, which was just the tonic in nervous markets, providing an offset to the yesterday's worrisome reading in U.S. ISM and PMI data. In the mix was opposition and Tory party rebel members of parliament voting to take control of the parliamentary agenda away from the government last night in London after calling an emergency debate on Brexit. Today they will vote on actually stopping a no-deal on October 31 by forcing a delay, which in the event will see Prime Minister Johnson call a general election (which he has stated he would do). At the least the development, which was largely expected, shows that a no-deal Brexit is not a certainty. The Pound rotated nearly 1.5% higher against the Dollar in recouping to levels above 1.2100. The UK currency yesterday hit a low of 1.1958, which aside from the post-Brexit referendum flash-crash lows of 2016 (which were likely a product of technical issues), is the lowest level since 1984.

    [EUR, USD]
    EUR-USD has rebounded toward 1.1000 after posting a 28-month low at 1.0926 yesterday. Sub-forecast U.S. ISM and PMI survey data yesterday fanned recession worries while rekindling expectations for a more committed Fed easing path, which weighed on the Dollar. We don't anticipated sustain gains, however, as the ECB remains on track to increase monetary stimulus settings at its policy meeting next Thursday. The risk of a no-deal Brexit, which has been amplified by the new UK prime minister, and which in the event would be detrimental to the Eurozone economy, is also high on the "reasons to be concerned" list with regard to EUR-USD. Resistance comes in at 1.1098-1.1000.

    [USD, JPY]
    The Yen has taken a rotation lower amid a risk-back-on sentiment. USD-JPY lifted to around 106.20-25 from sub-106.00 levels, while AUD-JPY saw a more pronounced advance. Above-forecast Caixin China services and composite PMI survey readings provided tonic to nervous markets, offset to the ill effects of yesterday's worrisome reading in U.S. ISM and PMI data. We still expect the Japanese currency will be prone to outperformance in the weeks and months ahead on the anticipation that its role as a safe haven currency will come into demand. While investor risk appetite has improved over the last week, global stock markets have been sputtering, and there remains a distinct restive tone in mix of factors influencing market sentiment. A Bloomberg report earlier in the week highlighted difficulties in arranging face-to-face trade talks between the U.S. and China, which are -- or were -- supposedly restarting this week. The U.S. rejection of Beijing's request to delay the start of tariffs that came into effect over the weekend has maintained high tension in relations. Also in the mix is Argentina's debt crisis and the risk of a disorderly, no-deal Brexit, which would have the potential to push the European economy into recession (though it should be stressed that a no-deal scenario is not a certainty, and it is still a possibility that Brexit could be cancelled).

    [GBP, USD]
    The Pound rotated nearly 1.5% higher against the Dollar in recouping to levels above 1.2100. The UK currency yesterday hit a low of 1.1958, which aside from the post-Brexit referendum flash-crash lows of 2016 (which were likely a product of technical issues), is the lowest level since 1984. Sterling's buoyancy came after opposition and Tory party rebel members of parliament voted to take control of the parliamentary agenda away from the government last night after calling an emergency debate on Brexit. Today they will vote on actually stopping a no-deal on October 31 by forcing a delay, which in the event will see Prime Minister Johnson call a general election (which he has stated he would do). At the least the development, which was largely expected, shows that a no-deal Brexit is not a certainty. It's clear that the opposition will only agree to an election (two thirds of House members must agree to an election, being one that would be outside the normal cycle) if there is a guarantee that Johnson can't rig an election after triggering Brexit on October 31. Johnson could always reverse no-deal legislation in the event his Tory party wins an election and is returned to government with a working majority. The Brexit Party, meanwhile, has stated that it would only stand aside in a general election if Johnson guarantees a no-deal Brexit. In sum, Brexit proceedings are still a little way from reaching a definitive point, which is increasingly looking likely to happen at a general election. This should for now maintain two-way directional risk with regard to the pound.

    [USD, CHF]
    EUR-CHF printed a fresh 26-month low at 1.0820 yesterday, extending what has been a five-month bear trend, reflecting in part demand for the Swiss Franc's as a safe haven and in part as markets factor in looser ECB monetary policy. 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 retreated to the lower 1.3300s after yesterday posting a two-and-a-half month high at 1.3382. Weak U.S. data revived expectations for a more committed Fed easing path, which weighed on the Greenback. We still expect the pairing to find a footing, with the Canadian Dollar being sensitive to global economic fallout, or expectations thereof, from the U.S.-China trade war given its correlation with commodity prices, especially oil. USD-CAD has support at 1.3270-73.

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