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By XE Market Analysis September 24, 2019 3:57 am
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    XE Market Analysis: Europe - Sep 24, 2019

    Narrow ranges have been prevailing among the main currencies so far today. EUR-USD has been maintaining less than a 15 pip range just under 1.1000 and above yesterday's 12-day low at 1.0966. Cable has been in a similarly narrow range under 1.2450. The UK's Supreme Court will rule on the government's appeal of the illegal verdict reached by Scotland's highest court regarding its five-week suspension of Parliament. We suspect, although this is by no means a certainty, it will agree with the recent court rulings seen in England and Northern Ireland, that the matter was "non-justiciable" -- being political rather than a legal matter. If it did rule it illegal, Boris Johnson would likely resign and a caretaker government would be formed by Parliament ahead of a general election. This would mean Brexit being delayed, too. Elsewhere, USD-JPY has settled around 107.50, above the two-week low seen yesterday at 107.31. Yen crosses, including EUR-JPY and AUD-JPY have seen a similar settling-above-lows price action. Recent declines in USD-JPY and yen crosses have been driven by safe haven demand for the Japanese currency. Global stock markets have continued a sputtering price action following some mixed signals from the U.S.-China front, and with a U.S.-Japan trade deal snagging up as Tokyo looks for assurances on car tariffs. Dissonance prevails in investor thinking on the U.S. trade war, with reasons for optimism coexisting with reasons for caution. The trade spat has been dragging on for well over a year now, and the pattern so far in the repeated rounds of (so far) fruitless discussions is that initial optimism and upbeat and at times conciliatory rhetoric gives way disappointment.

    [EUR, USD]
    EUR-USD has been maintaining less than a 15 pip range just under 1.1000 and above yesterday's 12-day low at 1.0966. There has been some narrowing in the 10-year T-note over 10-year Bund yield differential, though we continue with an overall bearish view of EUR-USD. The preliminary September Eurozone PMI readings, released yesterday, failed to show the expected improvement and instead showed a marked contraction in manufacturing activity and a sharp slowdown in services sector growth, leaving the composite at just 50.4, barely above the 50 point no change mark. The German economy remains on the brink of recession. EUR-USD is amid a long-term moderate downtrend, the latest leg of which has been in play since the late June highs above 1.1400. We expect this will remain in play. EUR-USD's recent major-trend low is at 1.0926.

    [USD, JPY]
    USD-JPY has settled around 107.50, above the two-week low seen yesterday at 107.31. Yen crosses, including EUR-JPY and AUD-JPY have seen a similar settling-above-lows price action. Recent declines in USD-JPY and yen crosses have been driven by safe haven demand for the Japanese currency. Global stock markets have continued a sputtering price action following some mixed signals from the U.S.-China front, and with a U.S.-Japan trade deal snagging up as Tokyo looks for assurances on car tariffs. Beijing permitted tariff waivers for U.S. soybean imports, according to a Bloomberg report, while President Trump has sounded out encouraging remarks after his Treasury Secretary Mnuchin announced that planned visit of Chinese officials to U.S. farms had been delayed. Mnuchin also confirmed that high-level face-to-face meetings with Chinese counterparts will take place in two weeks time. There remain reasons for caution, however. The trade war has been dragging on for well over a year now, and the pattern so far in the repeated rounds of (so far) fruitless discussions is that initial optimism and upbeat and at times conciliatory rhetoric gives way disappointment. With President Trump buoyed by recent data showing the U.S. holding up well, and with still over a year to go before the 2020 presidential election, he may not yet be too disposed to making any concessions, even though Beijing has been lobbing some bones his way. Meanwhile, the situation in the Mideast remains fragile and a potential source of destabilization, via oil prices, for the global economy, which in turn could lead to demand for yen. In Japan, BoJ Governor Kuroda said today that they are examining ways to further enhance the sustainability of its yield curve control (YCC) policy, specifically the profitability of financial institutions.

    [GBP, USD]
    Cable has been in a narrow range under 1.2450 so far today. The UK's Supreme Court will rule on the government's appeal of the illegal verdict reached by Scotland's highest court regarding its five-week suspension of Parliament. We suspect, although this is by no means a certainty, it will agree with the recent court rulings seen in England and Northern Ireland, that the matter was "non-justiciable" -- being political rather than a legal matter. If it did rule it illegal, Boris Johnson would likely resign and a caretaker government would be formed by Parliament ahead of a general election. This would mean Brexit being delayed, too. While the UK currency has lifted out of multi-year lows over the last month, it still remains about 14% below levels prevailing ahead of the vote to leave the EU in June 2016 in trade-weighted terms. Markets will continue to demand a hefty Brexit discount until it is concretely known what the Brexit endgame will be -- with a deal or without a deal, with a several-year transition or without a transition, or even a Brexit cancelled scenario.

    [USD, CHF]
    EUR-CHF has found a toehold today after printing a 12-day low yesterday at 1.0856, which was the culmination of a three straight day track lower since the SNB's policy announcement last week. The 26-month seen in early September at 1.0811 as so far remained untroubled. The SNB, to recap, kept both interest rates and its language on the currency unchanged, as widely expected. The policy rate and deposit rates were both left at -0.75% and the central bank repeated that that Franc remains "highly valued", while highlighting fragile markets and affirming the commitment to intervene in currency markets if needed. There was one surprise in the statement as the SNB changed the way the negative deposit rate is calculated with a new exemption threshold, designed to reduce costs for institutions as the global low-rate environment has "become more entrenched and could persist for some time yet". This means that the SNB followed the ECB, which also took steps to limit the impact of negative rates on banks, and the step may also prepare the ground for a mid-meeting move in Switzerland should Brexit developments turn sour. The growth forecast for this year has already been cut to just 0.5-1.0% from around 1.5% expected at the time of the June policy review, with the SNB highlighting that global risks remain tilted to the downside.

    [USD, CAD]
    USD-CAD has been lacking directional impulse over the last week, gravitating towards 1.3250 over this period. A pronounced drop in U.S. Treasury yields (down nearly 20 bp from September 13) hasn't been a bearish force as it might have been with the Canadian dollar having lost support from oil prices, which have given back a good portion of the price gains seen in the immediate wake of the attack on Saudi crude production and distribution facilities. The pledged release of strategic crude reserves in the U.S., China and Japan, along with a quicker than expected path to the resumption of crude production in the afflicted sites in Saudi Arabia have brought crude pries down, which in turn has seen the Canadian dollar lose demand. Front-month WTI crude is trading near $58.00, over $5 down on the high seen early last week. USD-CAD looks set to remain in the directional wilderness for now.

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