XE Market Analysis: Europe - Aug 12, 2019

The Pound hit fresh major-trend lows in thin Asia markets (both Japan and Singapore centres have been closed for public holidays), which put Cable at a 31-month low at 1.2015, GBP-JPY at a 33-month low and EUR-GBP at a 10-year high, at 0.9324. The fresh lows follow Friday's unexpected quarterly contraction in Q2 GDP data (of -0.2%) and with markets increasingly convinced that Boris Johnson and his newly formed Brexiteer cabinet are not bluffing when they say they the UK will leave the EU without a deal on October 31, if necessary. One increasingly dominant view in market narratives is that Johnson will take the UK out of the EU without a deal and re-negotiate terms with the EU from the "other side", although this would be risky as, unless he bolsters his position in a general election, he would be a significant risk of having his government taken down in a confidence vote. The pound managed to lift out of its lows on a London Times report that pro-EU members of parliament are aiming to force Johnson to delay Brexit as a means to avoid a no-deal Brexit. Johnson is reportedly set to be meeting with Irish prime minister, too, though it would be highly unlikely that the two would make any substantive progress with regard the Irish backstop blocking point. Elsewhere in currency markets, the other majors have been trading in narrow ranges. EUR-USD continued to orbit the 1.1200 level, which has been the case for a week now. USD-JPY settled in the mid 105.0s, above the seven-month low seen last week at 105.27. The PBoC set the midpoint of the yuan fix at 7.0211, a new 10-year-plus low, after 7.0136 on Friday.

[EUR, USD]
EUR-USD has continued to orbit the 1.1200 level, down on the near three-week high seen last week at 1.1249, which was the culmination of a four consecutive session ascent as the pair rebounded from the 27-month seen the week before at 1.1027. President Trump's ratcheting up of his trade war with China has increased the odds for Fed easing given the potential for a detrimental impact on the U.S. economy. This in turn has seen the dollar rotate lower against some currencies, including the euro. The ECB is geared-up for a turn of the stimulus spigot in September, however (as affirmed by its monthly bulletin yesterday) , which along with the palpable risk of a disorderly, no-deal Brexit scenario in less than three months, should curtail EUR-USD's upside potential. Italy's coalition government looks to be in crisis, too. Resistance comes in at 1.1250, and support at 1.1160-65.

[USD, JPY]
USD-JPY settled in the mid 105.0s, above the seven-month low seen last week at 105.27. The Yen has remained broadly underpinned after hitting major trend highs against many currencies in a safe-haven driven move last week, steadying concomitantly with a breakout of relative calmness in global stock markets following anxiety-mollifying Chinese data last Thursday showing an unexpected rise in exports in July. But there remains a skittish tone in investor sentiment with the U.S.-China trade war looking to be entrenching. We expect USD-JPY's bias will remain to the downside, assuming risk-off conditions reassert, which looks more likely than not in the weeks ahead. The pair has resistance at 106.10-15.

[GBP, USD]
The Pound hit fresh major-trend lows in thin Asia markets (both Japan and Singapore centres have been closed for public holidays), which put Cable at a 31-month low at 1.2015, GBP-JPY at a 33-month low and EUR-GBP at a 10-year high, at 0.9324. The fresh lows follow Friday's unexpected quarterly contraction in Q2 GDP data (of -0.2%) and with markets increasingly convinced that Boris Johnson and his newly formed Brexiteer cabinet are not bluffing when they say they the UK will leave the EU without a deal on October 31, if necessary. One increasingly dominant view in market narratives is that Johnson will take the UK out of the EU without a deal and re-negotiate terms with the EU from the "other side", although this would be risky as, unless he bolsters his position in a general election, he would be a significant risk of having his government taken down in a confidence vote. The pound managed to lift out of its lows on a London Times report that pro-EU members of parliament are aiming to force Johnson to delay Brexit as a means to avoid a no-deal Brexit. Johnson is reportedly set to be meeting with Irish prime minister, too, though it would be highly unlikely that the two would make any substantive progress with regard the Irish backstop blocking point. Elsewhere in currency markets, the other majors have been trading in narrow ranges.

[USD, CHF]
EUR-CHF has edged out a one-week low at 1-0886 today, returning focus to the 25-month low seen last Monday week at 1.0863. The ECB's course to additional monetary stimulus in September, and risk aversion in global markets following Trump's latest escalation in his trade war 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 has settled in the lower 1.3200s in recent sessions after correcting from a seven-week high seen last Wednesday at 1.3345. The Canadian Dollar, like its Dollar bloc brethren, rebounded from lows concomitantly with a recouperation in global stock markets after China's anxiety-mollifying trade data last Thursday, which showed an unexpected rise in Chinese exports in July. This has helped put a floor under crude prices, which the Loonie correlates with, after recent sharp declines. Although up from lows, however, front-month WTI prices are still showing about a 10% decline from month-ago levels, so we don't advise a bullish take on the Canadian currency. USD-CAD support comes in at 1.3207-10.