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By XE Market Analysis September 12, 2018 3:20 am
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    XE Market Analysis: Europe - Sep 12, 2018

    Both the Dollar and Yen have firmed up against most other currencies amid a backdrop of risk aversion in Asia, with the Japanese currency marginally outperforming the U.S. currency, seeing USD-JPY nudge lower after initially posting a one-week high in early Asia-Pacific dealings, at 111.65, with the pair then ebbing to the 111.45-50 area. The price was matched by EUR-JPY, AUD-JPY and most other Yen crosses, reflecting a modest pick up in safe demand for the Japanese currency as stock markets in Asia headed south amid ratcheting up verbal threats between the U.S. and China on trade and sanctions (U.S. threatening sanctions over treatment of Uighur people, Beijing threating sanctions on U.S. over trade dumping duties), which has offset a signal from Canada that it is ready to make concessions to the U.S. that may lead to a breakthrough in the NAFTA renegotiation (which helped lift the S&P 500 to a closing gain of 0.4% yesterday on Wall Street). The MSCI Asia-Pacific (ex Japan) index fell to 14-month lows. 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, while President Trump yesterday threatened that his "ready to go" with tariffs on the remaining $267 bln of Chinese imports. In the scenario that the U.S. proceeds with this, and particularly if and when 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.

    [EUR, USD]
    EUR-USD has continued to orbit the 1.1600 level. 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 nudged lower after posting a one-week high in early Asia-Pacific dealings, at 111.65, with the pair ebbing to the 111.45-50 area. The price was matched by EUR-JPY, AUD-JPY and most other Yen crosses, reflecting a modest pick up in safe demand for the Japanese currency as stock markets in Asia headed south amid ratcheting up verbal threats between the U.S. and China on trade and sanctions (U.S. threatening sanctions over treatment of Uighur people, Beijing threating sanctions on U.S. over trade dumping duties), which has offset a signal from Canada that it is ready to make concessions to the U.S. that may lead to a breakthrough in the NAFTA renegotiation (which helped lift the S&P 500 to a closing gain of 0.4% yesterday on Wall Street). The MSCI Asia-Pacific (ex Japan) index fell to 14-month lows. 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, while President Trump yesterday threatened that his "ready to go" with tariffs on the remaining $267 bln of Chinese imports. In the scenario that the U.S. proceeds with this, and particularly if and when 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 continued experience Brexit turbulence, rising and falling 40 odd pips late yesterday, for instance, on news that Irish PM Varadkar said a deal on the Irish border is reachable within weeks, and that he agreed with EU chef negotiator Barnier that an overall Brexit deal is possible by November, of not October. Neither Barnier or Varadkar pointed to actual progress, however, and there remains a fundamental political problem in the UK with the government's proposal for a soft Brexit, to see the UK leave the EU while retaining close regulatory alignment, seen as a worst-of-both-worlds choice for both those who favour remaining in the EU and those who favour a clean break from the EU. To snap the deadlock, a second referendum on Brexit might be the only option (it can be assured that the Tory government will not call for a general election), unless Boris Johnson manages to stage a successful leadership bid (which remains uncertain as polling suggests that BoJo is not as popular as he once was). Cable has nestled back near 1.3000 after U-turning from the post-Varadkar high at 1.3042. The forecast is for more turbulence ahead.

    [USD, CHF]
    EUR-CHF has ebbed back under 1.1300 after capping out at a two-week high at 1.1342 yesterday. The Franc has recently been intermittently in demand as a safe haven currency (particularly when the Turkish Lira and/or Italian assets have been under pressure), though it's a long Franc position is an expensive carry 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 dropped to a 12-day low of 1.3041 after Canadian officials signalled they are ready to make concessions in the contentious area of dairy in order to secure a new NAFTA deal. Oil prices have also surged given the threat hurricane Florence poses to the U.S. east coast and as sanctions on Iranian exports start to bite. USD-CAD has resistance at 1.3108-10. Any news of a handshake on NAFTA would likely spark a sharp drop in the pairing.

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