XE Market Analysis: Europe - Aug 02, 2019

The Dollar has traded mixed since President Trump's launching of a fresh advance in his trade war with China, rising versus the underperforming Australian buck while losing ground to the outperforming Yen, and softening moderately in the case against the Euro. AUD-USD, which is now in its 11th consecutive day of decline, printed a seven-month low at 0.6795. The move was led by AUD-JPY, which plummeted by over 2%, reaching its lowest levels since the flash crash of early January. The cross is widely seen as a forex market barometer of global investor risk appetite, partly as the Australian Dollar serves as a liquid currency market proxy on China. USD-JPY, meanwhile, dove by over 1%, making a near six-week low earlier Tokyo at 106.85. EUR-JPY and other Yen crosses have seen similar price actions. As for EUR-USD, the pair has settled around 1.1080-90, up on yesterday's 27-month at 1.1027. GBP-JPY hit a 33-month low, though the Pound has managed to hold above recent major-trend lows against the Dollar and Euro, among other currencies. A by-election in the UK yesterday saw the working majority of Boris Johnson's Tory party fall to just one seat, with the pro-remain in the EU Liberal party winning. This will make Johnson's government vulnerable in a confidence motion, which would have the potential to trigger a general election. This backdrop should keep the UK currency broadly under pressure.

[EUR, USD]
EUR-USD has settled around 1.1080-90, up on yesterday's 27-month at 1.1027. We retain a bearish view of the pairing, with the ECB geared-up for a turn of the stimulus spigot in September and with the Fed having refrained at this week's FOMC from adopting an easing cycle after implementing its first rate cut in a decade. The latest escalation in Trump's trade war with China could, if it leads to sustained risk aversion in global markets, elicit safe-haven demand for the Dollar, too, with the U.S. Treasury yields offering the best combo of liquidity and risk-free return around. Focus today falls on the release of the U.S. employment report for July. We see non-farm payrolls rising 170k, hourly earnings gaining to 0.3%, and the unemployment rate falling to 3.6% from 3.7%, data which should maintain our bullish view of the Dollar. EUR-USD has trend support at 1.0982-84, and resistance at 1.1120.

[USD, JPY]
The Yen has rallied sharply amid fresh trade warring, with Trump Twitter announcing another 10% in tariffs will be imposed on the remaining $300 bln in Chinese goods that haven't already been hit. Trump has before announced tariffs only to subsequently reverse course, though the September-1 implementation date is before the next round of talks start. Also, the threatened new tariffs would hit consumers much harder than earlier tariffs have, which deliberately focused on industrial goods to minimise the impact on consumer goods. The development sent global stock markets tumbling, boosting the demand for safe havens, including the Japanese currency. The biggest mover has been AUD-JPY, which plummeted by over 2% and reaching the lowest levels since the flash crash of early January. The cross is widely seen as a forex market barometer of global investor risk appetite, partly as the Australian Dollar serves as a liquid currency market proxy on China. USD-JPY, meanwhile, dove by over 1%, making a near six-week low earlier Tokyo at 106.85. EUR-JPY and other Yen crosses have seen similar price actions.

[GBP, USD]
GBP-JPY hit a 33-month low on the back of Yen outperformance, while the Pound has managed to hold above recent major-trend lows against the Dollar and Euro, among other currencies. A by-election in the UK yesterday saw the working majority of Boris Johnson's Tory party fall to just one seat, with the pro-remain-in-the-EU Liberal party winning. This will make Johnson's government vulnerable in a confidence motion, which would have the potential to trigger a general election. This backdrop should keep the UK currency broadly under pressure.

[USD, CHF]
EUR-CHF has taken as sharp dive over the last, extending to a 25-month low at 1.0949 today. The ECB's course to additional monetary stimulus in September, and risk aversion in global markets following Trump's escalation in his trade way with China, have been weighing on the cross. The risk of a disorderly no-deal Brexit on October 31 is also in the mix, which is a bearish factor for the cross.

[USD, CAD]
USD-CAD rallied for a second consecutive day yesterday, which produced a fresh six-week high, at 1.3247. Given the Fed's refrain from signalling an easing cycle, and given the risk-off theme that is currency coursing through global asset and commodity markets, we expect further upside in USD-CAD. Support comes in at 1.3171-73.