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By XE Market Analysis September 10, 2018 3:40 am
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    XE Market Analysis: Europe - Sep 10, 2018

    The Dollar has held steady versus the Yen while losing ground to a broadly firmer Euro, inspired by a rally in Italian assets on welcome signs of budgetary prudence on the part of the Italian government. EUR-USD rallied out of a three-week low at 1.1526 that was seen in early London trading to the upper 1.1500s. The biggest gainer out of the Euro crosses has been EUR-CHF, which is up by over 0.5%, reflecting of an unwind in the Swiss Franc's safe haven premium. EUR-USD still remains below the levels around 1.1615-20 that were prevailing ahead of Friday's U.S. jobs report release. Cable logged an intraday high of 1.2955, tracking EUR-USD upward. UK trade, production and GDP data were a mixed bag relative to expectations. USD-JPY held in a narrow range around 111.0, a level which marks the midway of the narrow sideways range that's been in play since late July. AUD-USD tested Friday's 37-month lows just under 0.7100 before settled around 0.7120. Market participants are on tenterhooks, waiting on the seemingly inevitable decision from the U.S. to proceed with the already earmarked tariff hikes on $200 bln worth of Chinese imports with President Trump threatening on Friday to go the whole way with tariff hikes on the remaining $267 bln of Chinese imports. Beijing today threatened retaliation.

    [EUR, USD]
    EUR-USD rallied out of a three-week low at 1.1526 that was seen in early London trading to the upper 1.1500s. The gains were driven mostly by a broad bid in the Euro, which in turn was underpinned by a rally in Italian assets on welcome signs of budgetary prudence on the part of the Italian government. The biggest gainer out of the Euro crosses has been EUR-CHF, which is up by over 0.5%. EUR-USD still remains below the levels around 1.1615-20 that were prevailing ahead of Friday's U.S. jobs report release, the strength of which firmed up odds for a December rate hike from the Fed, in addition to already fully-expected hike this month. In the bigger view, EUR-USD remains amid an overall bear trend, one that's been unfolding since mid April. Incoming U.S. data, like Friday's jobs report, should continue to firm-up expectations for a 25 bp Fed hike in December, which would follow an already fully-anticipated 25 bp hike in September. We would also expect the Dollar to appreciate in the scenario of sustained risk aversion in global markets. EUR-USD has resistance at 1.1621-23.

    [USD, JPY]
    USD-JPY has held in a narrow range around 111.0 in early-week trading so far. The 111.0 level marks the midway of the narrow sideways range that's been in play since late July. Both the Dollar and Yen have been tending to rise and fall in concert with one another versus other currencies over this period, although today it's been a case of thin ranges amongst all of the Dollar pairings and crosses. Stock markets in Asia were mixed with markets digesting the latest Trump threats on tariffs against China and Japan. The U.S. has yet to pull the trigger on the already detailed tariff hikes on $200 bln of Chinese imports, though Trump is threatening tariff hikes on the remainder of Chinese imports to the U.S., worth a further £267 bln. Should the U.S. hit the escalation button, USD-JPY would like break lower as the Yen is likely to outpace the Dollar in terms of safe-haven appeal. The pair has support at 110.38-40 and resistance at 111.20-22.

    [GBP, USD]
    The Pound is showing gains versus the Dollar and Yen, but is near net unchanged versus the Euro and other currencies. Cable logged an intraday high of 1.2955, largely reflecting broader Dollar weakness, and had since settled around 1.2940, still leaving the pair with about a 0.3% gain on the day. UK data were a mixed bag, with GDP growth rising to 0.6% growth in the three months to July, the highest rate for the rolling three-month figure since the three months to August 2017, while industrial production undershot expectations at 0.1% m/m in July, with the three months to July figure contracting 0.5%, which was blamed on the impact of abnormally warm weather on demand for electricity. Cable remains well off the high seen on Friday at 1.3028. Focus this week will be on Brexit, amid a sharpening sense of concern about the political and economic risks in the UK, and the September BoE MPC meeting, although this should be a relative non-event for markets with no changes expected to settings or guidance at this juncture. Cable has support at 1.2863-65.

    [USD, CHF]
    The Swiss Franc has been in demand since last week's release of stronger than expected Q2 GDP out of Switzerland. This pushed EUR-CHF back under 1.1300 and to a 14-month low at 1.1185. Switzerland posted Q2 growth of 0.7% q/q while Q1 growth was upwardly revised to 1.0% y/y from 0.6% y/y. It's rare for Swiss data to impact the currency, but the strength of the data, which marks the fifth consecutive quarter of above-average expansion, and the strength of the manufacturing sector in particular, have questioned the need for the SNB's ultra accommodative policy. The Swiss deposit rate is -0.75%. We don't think the SNB will be quite ready to signal a policy shift given the risk for further episodes of Franc-supporting risk aversion as the emerging market currency crisis plays out and given the risks for a further escalation in trade protectionism. The Swiss central bank will likely be wanting to time its tightening with ECB tightening.

    [USD, CAD]
    USD-CAD has made fresh highs near 1.3200, remaining buoyant in the wake of the release of contrasting U.S. and Canada jobs reports, where the former was better than expected and the latter missing the mark. NAFTA uncertainty, choppy oil prices, and risk-off conditions have kept the pairing very choppy of late. USD-CAD has resistance at 1.3226-28 and support at 1.3137-40.

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