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By XE Market Analysis September 12, 2019 5:37 am
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    XE Market Analysis: Europe - Sep 12, 2019

    USD-JPY printed a fresh six-week high at 108.16 ahead of the London interbank open, since settling back near the 118.0 mark. The price action is similar to yesterday's, with AUD-JPY and GBP-JPY having concurrently posted new six-week peaks, though EUR-JPY has so far failed to surpass the one-month high the cross saw yesterday. The yen's descent comes amid ongoing risk-on conditions in global markets. President Trump provided the latest injection of positivity by announcing that the latest round of tariff increases on Chinese goods imports will be delayed by two weeks. Markets have reacted in pavlovian-style, with stock markets rallying in Asia and S&P 500 futures rising after the cash version of the index closed on Wall Street yesterday with a 0.7% gain, while currencies with high-beta characteristics have outperformed in the forex realm, particularly against the yen in accordance with the inverse correlation the Japanese currency has with global-wide shifts in risk appetite. Elsewhere, EUR-USD has steadied after taking a rotation lower yesterday, recouping back above 1.1000 after printing an eight-day low at 1.0985. The pairing is now back to near net unchanged levels from where it was a week ago. The focus is on the upcoming ECB policy announcement, which is widely expected to bring further easing measures. 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. There is some scope for market-moving impact. The event risk has been that the package of measures will fall short of what markets had until recently been pricing in, though there has over the last week been some down-adjusting in stimulus expectations. Key U.S. data is looming up, too, with CPI and retail sales data are up tomorrow and Friday, respectively. We expect the data to affirm an ongoing benign price picture and a flat August performance in the retail sector, following strong July activity.

    [EUR, USD]
    EUR-USD has steadied after taking a rotation lower yesterday, recouping back above 1.1000 after printing an eight-day low at 1.0985. The pairing is now back to near net unchanged levels from where it was a week ago. The focus is on the upcoming ECB policy announcement, which is widely expected to bring further easing measures. 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. There is some scope for market-moving impact. The event risk has been that the package of measures will fall short of what markets had until recently been pricing in, though there has over the last week been some down-adjusting in stimulus expectations. Key U.S. data is looming up, too, with CPI and retail sales data are up tomorrow and Friday, respectively. We expect the data to affirm an ongoing benign price picture and a flat August performance in the retail sector, following strong July activity. Such outcomes wouldn't provide a dollar-buying cue, but would neither prompt a hit-the-sell-button reaction. As for EUR-USD, overall we retain a low-conviction mildly bearish view into next week's FOMC, assuming that the ECB pulls sufficiently on the stimulus lever.

    [USD, JPY]
    The Yen continued to descend amid ongoing risk-on conditions in global markets. President Trump provided the latest injection of positivism by announcing that the latest round of tariff increases on Chinese goods imports will be delayed by two weeks. Pavlovian-style, stock markets rallied in Asia, S&P 500 futures lifted after the cash version of the index closed on Wall Street yesterday with a 0.7% gain, while currencies with higher beta characteristics have outperformed in the forex realm, particularly against the Yen in accordance with the inverse correlation the Japanese currency has with global-wide shifts in risk appetite. Trump's concession on the trade front follows the departure of the hawkish U.S. national security advisor John Bolton from the administration, which has been a tonic for markets by potentially/presumably heralding a softening in stance with regard to Iran. Expectations for stimulus of the fiscal kind in Europe and China are also in the mix, offsetting a recent descaling in expectations for stimulus of the monetary kind by the Fed and ECB. The mood music could change quickly. On the U.S.-China trade front, we have, of course, many times heard upbeat rhetoric in the many previous rounds of the so-far fruitless trade discussions. For now, the Yen looks likely to remain on a downwardly bias track.

    [GBP, USD]
    Sterling has gone into directional a hold down, holding in mixed and mostly narrow ranges against most other currencies over the last couple of days. Cable looks to have found an equilibrium of sorts after rebounding about 3% out of the major-trend low seen last week at 1.1958. Regarding Brexit, Parliament closed on Tuesday, due to Prime Minister Johnson's controversial "proroguing" manoeuvre, which has shut down Parliament for five weeks, until October 14. Despite this, dramas are continuing at a pace. A Scottish court earlier ruled yesterday that the prorogation was illegal, and one of the MPs that was last week expelled from the Conservative Party called for Johnson to resign if there is substance to the ruling. No.10 is sticking to its guns, however, stating that there will be no reopening of Parliament, expressing confidence in its legal position. Our hunch is that nothing will become of the Scottish court ruling, though developments warrant close monitoring. Johnson, meanwhile, has been stating that a deal with the EU is still possible by October 18, though there is a lack of specifics, and we know his team hasn't presented the EU with any fresh proposals with regard to how the Irish border backstop issue -- the major sticking point of Breixt and proven prime minister slayer -- might be resolved. What is certain is that the UK is headed for a general election, most realistically in late November or early December, which will boil down to contest between pro-Brexit parties and the others, which take either pro-remain-in-the-EU and/or a pro-second reference positions.

    [USD, CHF]
    EUR-CHF has remained buoyant after printing a six-week high on Tuesday at 1.0968, 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 recouped to around 1.3200 after posting a new six-week low on Tuesday, at 1.3134. A near 4% decline in oil pries from Tuesday's peak, which was catalysed by the departure of hawkish-on-Iran U.S. national security advisor, John Bolton, has weighed on the Canadian currency relative to its U.S. counterpart. USD-CAD has resistance at 1.3234-35.

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