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By XE Market Analysis September 11, 2018 2:46 am
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    XE Market Analysis: Europe - Sep 11, 2018

    Dollar and Yen underperformance has been the main theme so far today, heading into the London interbank open, especially the Japanese currency, which is showing a 0.3% decline versus the Dollar, a 0.4% loss to the Euro and Australian Dollar and a decline of 0.5% against the Pound and Canadian Dollar. USD-JPY posted a four-session high of 111.48, while EUR-JPY has logged a three-session peak and AUD-JPY a two-session high. EUR-USD, meanwhile, recovered back above 1.1600 while Cable has posted a six-week peak of 1.3060, extending the gains seen yesterday after EU chief negotiator Barnier said a Brexit deal could be done by early November. The mood in global markets is currently neither risk-off nor risk-on, with participants waiting on the decision by the Trump administration on whether to proceed with the earmarked tariff hikes on $200 bln worth of Chinese imports.

    [EUR, USD]
    EUR-USD recovered back above 1.1600, floated by a combo of EUR-JPY gains and a broadly softer Dollar, while the Euro itself outperformed yesterday amid a continued recovery in Italian asset markets on signs of budgetary prudence from the Italian government. In the bigger view, we still view EUR-USD as remaining 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 lifted to four-day highs on Yen weakness, which has been since after the Tokyo fixing earlier. EUR-JPY and AUD-JPY, among most other Yen crosses are also up. USD-JPY's high is 111.47, with the pair establishing a new trading band that is about 50 pips up on yesterday's. Market narratives are pointing to mixed reasons for the move. There has been a Bloomberg report saying that the BoJ may raise its ETF target, while the South Korean media reported that U.S. national security advisor John Bolton said that North Korea's Kim pledged to dismantle his nuclear weapons program when he met with South Korea President Moon Jae-in last year (though there are many more recent signs that Kim is ultimately seeking to North Korea become an accepted nuclear state). U.S. stock futures have also managed modest gains, while Chinese stock markets rallied into positive territory after AM session declines into negative territory (though slumping back to near net unchanged levels so far in the PM session). Market participants are still waiting on the decision from the U.S. to proceed with the earmarked tariff hikes on $200 bln worth of Chinese imports. In the scenario that the U.S. proceeds with this, and particularly when and if there are surer signs that the trade war is impacting the U.S. economy, this could potentially be a strongly bearish circumstance for USD-JPY.

    [GBP, USD]
    Sterling has consolidated the gains it saw against the Dollar and most other currencies yesterday. This move was sparked by EU chief Brexit negotiator, Barnier, who remarked that a deal with the EU was "possible" and "realistic" by the beginning of November, which would allow time for it to be approved by the British and EU parliaments ahead of the March 29 Brexit D-day. Cable sprung back above 1.3000 from sub-1.2950 levels, posting an 11-day high at 1.3052. His remarks show that the EU is, as ever, ready and waiting to make a deal when the source of all things uncertain with regard to Brexit is across the channel in the UK. Barnier cautioned that the Irish border issue (to prevent a hard border, post-Brexit) remained problematic. It also remains to be seen how the British government will respond to the more than likely EU rejection of the idea of a EU-UK single market for goods and agricultural products. All this amid frantic behind-the-scenes political machinations in London. News today that 80 Tory MPs would vote against the government's plan sets up a base for Boris Johnson to make leadership challenge. The scenario of BoJo becoming PM would greatly increase the odds for a "Canada-plus" type of deal with the EU, though the timing for a leadership challenge (a process that would take a couple of months) is, to use British understatement, "not good."

    [USD, CHF]
    EUR-CHF has rallied strongly over the last day, concomitantly with Italian asset markets, which has seen some of the Franc's safe haven premium unwind. The Swiss Franc had also been in demand since last week's release of stronger than expected Q2 GDP out of Switzerland, which pushed EUR-CHF to a 14-month low at 1.1185. The cross has now recovered above 1.1300, to a peak so far of 1.1328. It is expense to carry a long position of Francs given the -0.75% deposit rate. We don't think the SNB will be quite ready to signal a less dovish 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 drifted to two-session lows 1.3135, returning the pairing to the lower echelons of the range that's been unfolding over the last week. Hopes for a NAFTA deal have capped the pairing over the past week, while softer oil prices have curtailed downside potential. USD-CAD has range support at 1.3108-10. Any news of a handshake on NAFTA would likely spark a sharp drop in the pairing.

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