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By XE Market Analysis September 10, 2019 4:34 am
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    XE Market Analysis: Europe - Sep 10, 2019

    The Yen has remained under pressure, which has seen both USD-JPY and AUD-JPY print fresh six-week highs. U.S. Treasury Secretary Steven Mnuchin signalled "lots of progress on talks" recently with regard to trade negotiations with Beijing. We've heard such upbeat rhetoric many times in the many previous rounds of the so-far fruitless trade discussions, though the signalling, along with expectations of economic stimulus in Europe and China, have been keeping global stock markets underpinned, which in turn has been feeding an unwinding in the Japanese currency's safe haven premium. The Swiss franc has been under pressure for a similar reason. EUR-CHF earlier printed a fresh six-week high. Elsewhere, the dollar has been trading with a steady-to-softer bias (outside the case for USD-JPY). Cable has remained buoyant after printing a six-week high yesterday, and EUR-USD has also remained underpinned, above 1.1000. Sterling has rallied over 3% from the major-trend lows it saw last week. It's now UK law that a no-deal Brexit cannot be triggered on October 31, and that an extension to January 31 will happen in the event that a Brexit deal isn't made by October 19, or that Parliament doesn't vote for a no-deal exit from the EU (which is very unlikely in the case of the former, and is a certainty in the case of the latter). The EU would still need to approve an extension, though in the scenario of there being another general election in the UK -- which is now a certainty, though no likely before the end of November -- the group would likely accede. The Brexit front will now go somewhat quiet with Parliament now closed for five weeks ahead of what is sure to be another super intense phase from mid October through to Halloween and beyond.

    [EUR, USD]
    EUR-USD has has settled around the 1.1025-35 mark after rising during the latter part of last week, which left an 11-day high at 1.1084. The August U.S. jobs report generated some chop, although the combination of a softer than anticipated job gain but otherwise strong report left markets without a strong sense of direction. Fed Chair Powell left the door open to a 25 bp easing at the mid-September FOMC, but refrained from sounding too dovish, saying that the Fed will "act as appropriate" to sustain the now record-long expansion. Powell also said outlook is a "favorable" one, with the economy "in a good place" and is continuing to perform well with no recession in the forecast. This should keep the Dollar in demand on dips for now. The focus will fall on this Thursday's ECB meeting, which comes with updated staff projections and is widely expected to see the ECB introduce further easing measures. The event risk is that the package of measures will fall short of what markets have been pricing in, because without regulatory changes there is limited room for government bond purchases to be extended significantly. There could be a foray into other asset classes on the QE front but the overall amount is likely to be relatively small for now. We are expecting a small 10 bp cut in the deposit rate to -0.50%, with a tiered system to limit the impact of negative rates. As for EUR-USD, overall we retain a mid-to-low-conviction bearish vie. Support comes in at 1.0998-1.1000.

    [USD, JPY]
    USD-JPY and AUD-JPY printed fresh six-week highs, driven by a continued unwinding in the Japanese currency's safe haven premium. U.S. Treasury Secretary Steven Mnuchin signalled "lots of progress on talks" recently with regard to trade negotiations with Beijing. We have, of course, many times heard such upbeat rhetoric in the many previous rounds of the so-far fruitless trade discussions, though the signalling, along with expectations of economic stimulus in Europe and China, have been keeping global stock markets underpinned, which in turn has been feeding an unwinding in the Japanese currency's safe haven premium. So, for now, the Yen looks likely to remain on a downwardly bias track. Beware, as things are apt to change quickly in the Trumpina trade wars.

    [GBP, USD]
    Cable has remained buoyant after printing a six-week high yesterday. It's now UK law that a no-deal Brexit cannot be triggered on October 31, and that an extension to January 31 will happen in the event that a Brexit deal isn't made by October 19, or that Parliament doesn't vote for a no-deal exit from the EU (which is very unlikely in the case of the former, and is a certainty in the case of the latter). The EU would still need to approve an extension, though in the scenario of there being another general election in the UK -- which is now a certainty, though not likely before the end of November -- the group would likely accede. The Brexit front will now go somewhat quiet with Parliament closed, as of today, for five weeks ahead of what is sure to be another super intense phase from mid October through to Halloween and beyond. As for Her Majesty's currency, we anticipate a consolidation phase, holding comfortably above trend lows but retaining something near to a 15% Brexit discount. A no-deal eventuality cannot be ruled out as Prime Minister's Conservative Party, now purged of "EU remainers", is leading in polls. When it comes to the election, much will depend on whether the Conservatives can draw votes away from the Brexit Party, or whether the Conservatives would form a coalition with the Brexit Party, and how pro-EU/pro-second referendum parties -- which now include Labour -- organise themselves. A possible coalition between Labour and the Liberal Democrats would potentially given pro-Brexit parties a run for their money.

    [USD, CHF]
    EUR-CHF has remained buoyant after printing a one-month high on Friday at 1.0931, which extended the rebound from the 26-month low seen on Tuesday at 1.0811. The pickup in risk appetite in global markets, and reduced risk for a no-deal Brexit, has taken the pressure off the ECB as it heads into next Thursday's government council meeting. This has helped float the Euro while concurrently fostering an unwinding in the Franc's safe haven premium (such as it is given the punishing -0.75% deposit rate in Switzerland).

    [USD, CAD]
    USD-CAD has remained heavy, yesterday printing a fresh six-week low, in the wake of last Friday's dual U.S. and Canadian jobs reports, with unexpected strength in the latter generating demand for the Canadian currency. The recouperation in risk appetite in global markets over the last week, with the U.S. and China headed back to the negotiating table, has been a positive for the Canadian Dollar, too, along with other commodity currencies. Oil prices are up over /% from week-ago levels (WTI futures). Resistance comes in at 1.3270-73.

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