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By XE Market Analysis September 19, 2017 4:13 am
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    XE Market Analysis: Europe - Sep 19, 2017

    The yen continued to weaken and the euro outperform, which drove EUR-JPY, now up in eight of the last nine sessions, to a 22-month peak at 134.14. USD-JPY, meanwhile, logged a new two-month high, at 111.88. Markets are factoring in the BoJ to affirm that it remains committed to ultra-accommodative monetary policy at its post-policy meeting announcement on Thursday, given the cool inflation backdrop and continuing concerns about the self-sustainability of economic growth, for the this to emphasize a contrasting bias to other major central banks, which are at varying stages of slow-go policy normalization. Euro outperformance lifted EUR-USD to a six-session high at 1.2005. More of the same looks likely..

    [EUR, USD]
    Euro outperformance lifted EUR-USD to a six-session high at 1.2005. Markets have been factoring in the ECB's path to tapering QE, though a lot of this story would seem to have been priced into EUR-USD by now. The FOMC is this week's main event. The Fed will announce its decision on Wednesday, where it is widely anticipated to mark the start of the process to deleverage its balance sheet, which is intended to be very gradual in nature as per the path the central bank laid out in June. Of more importance will be the dot-plot forecasts and about what they suggest about rate moves this year and through 2018. On balance, we think the Fed's guidance might just be sufficiently hawkish to give the dollar a bid, although nothing too dramatic as caution will be evident in the communication given geopolitical risks and the hurricane impact.

    [USD, JPY]
    USD-JPY clocked a new two-month high, this time at 111.88, while EUR-JPY forayed into 22-month high territory, with the yen underperforming into the BoJ policy meeting this week. The Japanese central bank begins its 2-day policy meeting on Wednesday and announces on Thursday. No changes are expected to the Bank's ultra-loose policy, given the cool inflation backdrop. The August trade report (Wednesday) should see a narrowing in the surplus to JPY 50.0 bln from 421.7 bln previously. The July all-industry index (Thursday) should fall 0.2% m/m versus the prior 0.4% increase. Assuming there is no flare up in geopolitical tensions, which is by no means certain as North Korea marches toward nuclear ICBM capability, we would expect the yen to remain under pressure against the dollar and other major currencies, with the BoJ seen some steps behind its major peers on the path to the normalization of monetary policy. USD-JPY has support at 110.79-80. The July-16 high at 112.20 provides an upside target.

    [GBP, USD]
    Sterling took a knock after BoE Governor Carney walked back hawkish guidance, saying yesterday at a speech at the IMF that "any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent, and be consistent with monetary policy continuing to provide substantial support to the economy." He also stressed that there "remain considerable risks to the UK outlook, which include the response of households, businesses, and financial markets to developments related to the process of EU withdrawal." Carney is evidently displeased with the markets reaction to the BoE's statement last week, where markets seemed to run with the hawkish soundbites while ignoring the dovish soundbites. The pound, already on the ebb after the outsized gains of last Thursday and Friday, declined further as markets responded to Carney's remarks. Prospects for a "dovish tightening" should keep a lid on the pound's upside potential from here. Cable logged a correction low at 1.3465, since settling in the mid 1.35s. The highs at 1.3616-18 mark resistance. We advice fading gains.

    [USD, CHF]
    EUR-CHF has climbed back above 1.1500, putting last week's six-week high at 1.1529 back in the scopes. The franc took a knock on last week's SNB 's post-policy meeting guidance, with the central bank, while admitting that exchange rate overvaluation is now less acute, stating that it would remain willing to "intervene in FX markets as necessary" which is "essential in order to reduce the attractiveness of the Swiss franc investment and thus ease pressure on the currency." The SNB said that the currency "remains highly valued," even in light of the relatively sharp weakening the currency saw from late July. We look for EUR-CHF to test early-August 32-month peak is at 1.1538, and continue to advocate that the cross will make an eventual return to the SNB's former floor level, at 1.2000.

    [USD, CAD]
    USD-CAD has settled after springing a two-week high at 1.2338 as the Canadian dollar dove following remarks by BoC member Lane, that the Trump-instigated NAFTA renegotiation is a source of uncertainty for Canadian businesses and the economy. This followed the pair last week making its first up week of the last five weeks, a sign that the downside bias has lost puff. The pairing fell by some 12% since May, reflective of the Canadian economy's pulling out of the low-oil-price-era doldrums and consequential commencement of a BoC tightening cycle. With the Fed, we expect, seen providing sufficient hawkish undertones to general a bid in the U.S. buck at tomorrow's post-FOMC announcement, we anticipated further upside in USD-CAD. Support is at 1.2208-10. The September-26 peak at 1.2415 provides and upside target.

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