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By XE Market Analysis September 25, 2019 4:28 am
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    XE Market Analysis: Europe - Sep 25, 2019

    The dollar recouped losses seen yesterday in the immediate wake of news that the Democrats were commencing a formal impeachment inquiry against President Trump. The news, coupled with disappointing September consumer confidence data out of the U.S. and the harshly criticism of Trump on China's trade practices at the UN, saw S&P 500 futures close yesterday with a worst-in-a-month 0.84% decline. Asian stock markets took the bearish cue and declined, though S&P 500 futures have held steady. The narrow trade-weighted USD index (DXY) is showing a modest 0.2% gain, at 98.51, which is near the midway point of the sideways range seen over the last week. The index yesterday posted a three-session low at 98.29. EUR-USD is trading near pre-impeachment news levels near 1.1000, down from the peak seen at 1.1024. USD-JPY recovered to the 107.35-40 area from a low at 106.96. The New Zealand dollar rallied and then settled back following the RBNZ's unchanged policy decision earlier, which left settings unchanged, as had been widely anticipated, but produced less dovish than expected guidance -- the phase that policymakers would do more "if necessary" most accurately summing up the bank's stance. China's version of the Beige Book (a report on anecdotal economic activity levels) concluded that the economy has been slowing at an increasing rate in Q3 so far. AUD-USD dipped on this, making a low at 0.6777, bringing the recent three-week low at 0.6760 into scope. Weekly API U.S. oil inventory figures showed an unexpected increase, which shunted oil prices lower. WTI futures, at levels below $57, have now more than reversed the sharp gains seen in the immediate wake of the attack on Saudi oil facilities.

    [EUR, USD]
    EUR-USD lifted to a high at 1.1024 in the immediate wake of the news that the Democrats initiated an impeachment inquiry against President Trump. Regarding the attempt at impeachment, much will depend on what the evidence shows with regard the charge of Trump's alleged "betrayal of national security", while political pundits in the U.S. are almost unanimously saying that GOP-controlled Senate can be relied upon to vote against the charge of "high crimes and misdemeanors." Trump therefore is unlikely to be removed from office, while the political impact of the proceedings heading into next year's presidential election remains uncertain (and evidence dependent, which is not clear at this stage). For now, there may not be too much impact on the dollar. Overall, and despite some recent narrowing in the 10-year T-note over 10-year Bund yield differential, we retain a moderately bearish view of EUR-USD. The preliminary September Eurozone PMI readings, released at the start of the week, were striking for failing to show an expected improvement and instead showing a marked contraction in manufacturing activity, with service sector activity slowing sharply, leaving the composite at just 50.4, barely above the 50 point no change mark. 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 recovered to the 107.35-40 area from a 16-day low that was printed at 106.96 following the impeachment news out of the U.S., which sparked a reflexive risk-off response in markets, of which hitting the yen "buy button" is part of. 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, and is apparently looking to buy pork (due to swine flu in China), though President Trump was harshly critical of China's trade practices during a speech at the UN yesterday. There are good reasons for circumspection regarding the trade war, which 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 unambiguous disappointment. 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 this week that policymakers are examining ways to further enhance the sustainability of its yield curve control (YCC) policy, specifically the profitability of financial institutions.

    [GBP, USD]
    The pound has given back most of the gains seen yesterday, and has settled at moderately softer levels against the dollar from week-ago levels, and is near net unchanged in the case against the euro over this time frame. Big developments happened in the UK over the last 24 hours. The most headline-hogging was the unanimous ruling by the 11 justices at the UK's Supreme Court that deemed Prime Minister Boris Johnson's suspension of Parliament to have been unlawful. This is a majorly big story in the UK, heralded as a historic re-setting of the UK's executive, legislative and judicial branches in the context of the nation's unwritten constitution and parliamentary system of governance. It probably won't have a great bearing on the Brexit process, however, the ultimate course of which will be decided by the upcoming general election. The other main development over the last day is the crystal-clear rebuttal by a number of key EU officials of Boris Johnson's plans for "alternative arrangements" for the Irish border than aim to do away with the need for the backstop clause. This suggests that Johnson, a lame duck prime minister but who is refusing to resign in the light of the Supreme Court's ruling, won't reach a deal with the EU by October 19, the date when a delay in Brexit to January 31 will be triggered in the eventuality that no deal has been made. An election will then loom in November or December. Note that opposition is tactically refraining from a confidence motion against Johnson's government until a no-deal on October 31 has been assured.

    [USD, CHF]
    EUR-CHF is down for a fifth consecutive day, today printing a 13-day low at 1.0842. The cross has dropped in each day since the SNB's policy announcement last week, which will be frustrating to Swiss policymakers given their chronic concerns of the franc's chronic state of overvalue (which regularly tops the Economist magazine's Big Mac purchasing parity comparison of currencies). The 26-month seen in early September at 1.0811 has so far remained untroubled, but looks vulnerable. The SNB, to recap, kept both interest rates and its language on the currency unchanged, as had been 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 rebounded back above 1.3250 after posting a nine-day low at 1.3232. The paring continues to lack directional impulse, which is been much the case for over a week now, with rises and falls quickly followed by a gravitational rotation back towards the 1.3250 level. The recent pronounced drop in U.S. Treasury yields (down nearly 25 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 now more than given back 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 under $58.00. For now, USD-CAD looks set to remain in the directional wilderness.

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