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By XE Market Analysis September 19, 2019 3:47 am
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    XE Market Analysis: Europe - Sep 19, 2019

    The Dollar has traded mixed so far today, after rallying in the wake of the Fed's policy announcement. The Fed did the expected and cut the funds rate band by a quarter point to 1.75%, yet the decision came at the expense of a cohesiveness among policymakers, with the vote being 7-3 (the three dissenters is the most since 2016), with the two hawks from July, George and Rosengren, again voted for no change, while the uber-dove Bullard argued for an aggressive half point easing. The impact was a upward shift in Treasury yields and a concomitant rotation higher in the dollar. The narrow trade-weighted USD index (DXY) rallied yesterday, but remained below the highs from the previous day while the index is now showing a modest 0.2% decline today. EUR-USD has recouped to near the 1.1050 level, up from the post-Fed low at 1.1013. USD-JPY, after making a 108.47 high following the Fed's announcement, dropped to a low of 107.78 during Tokyo trading, aided by Yen outperformance as the Japanese currency picked up a safe haven bid as global stock markets sputtered. The biggest mover out of the main currencies has been AUD-JPY, which has dropped by over 1% today, while most developing-world currencies have weakened against the Dollar and Yen. We anticipate the Dollar will remain broadly underpinned against most currencies.

    [EUR, USD]
    EUR-USD has recouped to near the 1.1050 level, up from the post-Fed low at 1.1013. Overall, we retain a bearish view of the pairing. While the Fed cut the funds rate band by a quarter point to 1.75%, the decision came with two of the 10 voting policymakers voting for no change, outnumbering uber-dove Bullard, who dissented in favour for an aggressive half-point easing. The impact was a upward shift in Treasury yields and a concomitant rotation higher in the dollar, although the currency has since corrected somewhat. The Fed's decision juxtaposes last week's ECB promise of open-ended asset purchases. EUR-USD has been in a long-term moderate downtrend, the latest leg of which has been in play since the late June highs above 1.1400. The favourable yield carry of the Dollar -- 1.8% for the 10-year U.S. T-note vs nearly -0.5% for the benchmark Bund and -0.15% for the 10-year JGB -- along with the fact that the Treasury market stands as the most liquid risk-free asset market in the world, means that the U.S. currency is likely to remain underpinned (much to President Trump's chagrin, no doubt). EUR-USD has resistance at 1.1048-50, and support at 1.0975.

    [USD, JPY]
    USD-JPY, after making a 108.47 high following the Fed's announcement yesterday, dropped to a low of 107.78 during Tokyo trading, aided by Yen outperformance as the Japanese currency picked up a safe haven bid as global stock markets sputtered. The biggest mover out of the main currencies has been AUD-JPY, which has dropped by over 1% today. USD-JPY, after rallying out of the late August major-trend low at 104.45, has over the last week been trading without directional certainty. More of the same looks likely for now. The BoJ left policy on hold and stuck with the existing monetary stimulus, as expected today. The bank also called for a re-examinisation of prices and the economy at the October meeting, which suggests there could be action down the line. The BoJ didn't immediately follow the Fed, which delivered a 25 bp rate cut yesterday but without signalling further moves down the line. Japan's central bank highlighted the need to pay close attention to the possibility of losing momentum toward its 2% target as global growth slows. Recent improvement in market sentiment also seems to have taken some pressure off the BoJ to act immediately, but its call for a review in October suggests that the bank is prepared to act again if things look worse.

    [GBP, USD]
    Sterling is holding above lows seen in the wake of cooler than expected UK inflation data yesterday. Cable recouped above 1.2450, up from the post-data low at 1.2439. UK August CPI came in at 1.7% y/y, down from 2.1% y/y in July and well off the median forecast for 1.9% y/y. The dip comes despite a 5%-plus weakening in the trade-weighted value of the pound from August 2018 levels, and despite UK wage growth hitting a near 10-year high recently. The policy implications of the data are also dampened by the fact that the BoE is likely to remain on the sidelines with the Brexit process coming to crucial phase of resolution, with the the outcome and potential impact on the UK economy still uncertain.The BoE meets today, and is widely expected to leave policy settings unchanged. Taking a step back, the pound is trading about 4% up from recent trend lows. We don't see too much scope for sustained gains, however, with markets likely to continue to demand a hefty Brexit discount into the upcoming election, which will likely be late November or early December. The president of the European Commission, Juncker, said yesterday that the risk of a no-deal Brexit is "palpable." Although the UK Parliament has legislated against it on October 31, a no-deal scenario remains a possibility at a later date, depending on how the upcoming election in the UK turns out. EU officials have also been signalling that they are prepared to take negotiations to the "other side" of a no-deal Brexit rather than cede on the Irish backstop, which has been the fundamental block to finding a deal on Brexit.

    [USD, CHF]
    EUR-CHF has printed a fresh seven-week high at 1.1017, extending the rebound from the early-September 26-month low at 1.0811. The recent 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). The SNB's quarterly policy review is up today, and is widely expected to hold steady while stressing that it remains ready to intervene in forex markets if necessary to offset strength in the Franc, which it considers to be significantly overvalued.

    [USD, CAD]
    USD-CAD has recovered to levels around 1.3300 after Monday's sharp dip to a 1.3210 low. News of the drone attack on Saudi oil facilities was taken as CAD buying cue by markets in early Asia on Monday, though the trade ran out of steam as oil prices steadied and then rebound sharply on a report that suggested production could recover much quicker than initially feared. Saudi Arabia has also stated that it will tap into stockpiled crude to maintain exports for a period, while the U.S. and Japan have said they will release oil reserves if necessary. Nonetheless, the geopolitical situation in the Mideast is fragile, especially with the U.S. openly considering taking military action against Iran, which it suspects of being involved. The Fed's less dovish than expected guidance following its as-expected 25 bp rate cut has also been a support for USD-CAD, which expect to remain underpinned.

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