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By XE Market Analysis September 13, 2019 2:39 am
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    XE Market Analysis: Europe - Sep 13, 2019

    The yen posted fresh trend lows against the dollar, though remained just off the lows it saw against the euro, Australian dollar and other currencies yesterday. USD-JPY printed a six-week high at 108.26 in what is now the fourth consecutive day of higher-high making. The Japanese currency has been deflating maid a persisting phase of risk-on conditions in global markets. The ECB's policy bazooka, particularly the promise of open-ended asset purchases, has been the latest fodder for bulls on world stock markets, which comes amid a cooling in U.S.-China trade tensions. Elsewhere, EUR-USD has settled around the 1.1070 mark after recouping from the post-ECB announcement low at 1.0926.

    [EUR, USD]
    EUR-USD has settled around the 1.1070 mark after recouping from the post-ECB announcement low at 1.0926. The ECB's launched a policy bazooka yesterday. The interest rate on the deposit facility will be decreased by 10 basis points to -0.50% and net purchases will be restarted under the central bank's asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The ECB stated that it expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and that net asset purchases will run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates. The promise of open-ended asset purchases was a surprise to markets, although Euro selling failed to sustain. The FOMC is up next week, with the Fed on track to cut rates a second time, although aggressive action isn't likely considering the strength in the U.S. economy. Overall, despite the choppy price action over the last day, we retain a bearish view of EUR-USD.

    [USD, JPY]
    The Yen posted fresh trend lows against the dollar, though remained just off the lows it saw against the euro, Australian dollar and other currencies yesterday. USD-JPY printed a six-week high at 108.26 in what is now the fourth consecutive day of higher-high making. The Japanese currency has been deflating maid a persisting phase of risk-on conditions in global markets. The ECB's policy bazooka, particularly the promise of open-ended asset purchases, has been the latest fodder for bulls on world stock markets, which comes amid a cooling in U.S.-China trade tensions. 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, however, the Yen looks likely to remain on a downwardly biased track.

    [GBP, USD]
    The Pound continues to trade without domestically-driven direction, which has been the case since Parliament closed on Tuesday. On the Brexit front there are currently political wranglings over the ruling of a Scottish court that Prime Minister Johnston's "proroguing" (shutting down of Parliament for a period) was illegal, with opposition parties demanding that Parliament be reopened and with Johnson insisting that it won't. We suspect that the government will get its way on this one. Meanwhile, with Johnson at risk of failing to deliver his "do or die" pledge to achieve Brexit on October 31, with the option to leave without a deal at that date now outlawed, there is a sense that the normally thick-skinned Boris is feeling the pressure to make a deal with Brussels on what would be a revamped version of the already-on-the-table Withdrawal Agreement. The EU has dangled the option of limiting the Northern Ireland backstop, which would effectively wedge a customs border between Northern Ireland and the rest of the UK. That's the best option for Johnson if he is serious about pulling off a Halloween Brexit. Otherwise he would have to come up with alternative border arrangements that would satisfy the EU's demands of maintaining the integrity of both the single market and the Good Friday Peace Agreement, which looks impossible. Bottom line, there won't likely be sufficient support in Parliament for whatever Johnson comes up with, unless he yields to demands for there being a second, confirmatory referendum, which would be politically risky for him as he heads into an election with the Brexit Party snapping at his heels. The most likely scenario is for the Brexit deadline to be pushed out to January 31, with a general election November or December.

    [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 fostered 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 printed a on-week high at 1.3325, extending the rebound from the six-week low on Tuesday, at 1.3134. A sharp drop in oil pries this week, 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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