XE Market Analysis: Europe - Aug 13, 2019

The Dollar has traded moderately firmer against most of the other main currencies outside the case against the Australian Dollar, which has modestly outperformed so far today. The Yen softened, correcting some of the recent safe-haven driven gains, despite a tumble on Wall Street yesterday and across Asian equity bourses today, though the Japanese currency has lifted out of its lows into the London interbank open. There is plenty on the worry list, including disruptive pro-democracy protests in Hong Kong and a crash in Argentina's peso following a poor performance of market-friendly Argentine President Macri in presidential primaries. Singapore also made a substantial cut to its GDP forecast for 2019 (to between 0% and 1%, down from 1.5%-2.5%), citing the deteriorating global conditions, with the Hong Kong situation, along with the U.S.-China and South Korea-Japan trade wars, and Brexit, all getting a mention. The U.S. yield curve is now at its level since 2007, which is seen by many as portending recession, or at least a significant risk of recession. GS analysts also said that the U.S.-China trade war will have a bigger detrimental impact on the U.S. economy than it previously thought. A Reuters poll, meanwhile, found a new high in the probability being ascribed by analysts for there being a no-deal Brexit, which is now pegged at 35%, up from 30% in the previous survey. Amid all this, the PBoC set the yuan at a new near 11-year low against the dollar at the day's midpoint fixing, at 7.0326, versus 7.0211 yesterday. Given the risk-on vibe, the Yen looks likely to find fresh demand in London, with shorts of AUD-JPY and GBP-JPY likely to be principal routes of speculative participants.

[EUR, USD]
EUR-USD is now in its seventh consecutive day of being in orbit of the 1.1200 level. This comes with both the Fed and ECB in easing mode, though we think the risk of a disorderly Brexit will, while this remains the case, ultimately tip the balance of the pairing to the downside given the potentially detrimental near-to-medium term economic impact that this could have on the Eurozone economy. Safe haven demand for U.S. Treasuries, the biggest and most liquid risk-free asset market in the world, may also prop the Dollar up relative to the Euro should further bouts of risk-averse positioning take hold, which at the current juncture looks more likely to be the case than not as the consequences of trade warring (U.S.-China, South Korea-Japan) become increasingly evident, and with the disruptive protests in Hong Kong also unsettling investors. Italy's coalition government also looks to be in crisis, too, which is an added weight on the bearish side of the EUR-USD scales. Resistance comes in at 1.1250, and support at 1.1160-65.

[USD, JPY]
USD-JPY has found some relative stability so far today after declining for three straight sessions through to yesterday, though we expect further safe-have downside will be seen. There is plenty on the worry list, including disruptive pro-democracy protests in Hong Kong and a crash in Argentina's peso following a poor performance of market-friendly Argentine President Macri in presidential primaries. Singapore also made a substantial cut to its GDP forecast for 2019 (to between 0% and 1%, down from 1.5%-2.5%), citing the deteriorating global conditions, with the Hong Kong situation, along with the U.S.-China and South Korea-Japan trade wars, and Brexit, all getting a mention. The U.S. yield curve is now at its level since 2007, which is seen by many as portending recession, or at least a significant risk of recession. GS analysts also said that the U.S.-China trade war will have a bigger detrimental impact on the U.S. economy than it previously thought. A Reuters poll, meanwhile, found a new high in the probability being ascribed by analysts for there being a no-deal Brexit, which is now pegged at 35%, up from 30% in the previous survey. Should risk-off conditions take a strong grip, shorts of AUD-JPY and GBP-JPY are likely to be principal vehicles for speculative participants.

[GBP, USD]
The Pound has has given back more than half the rebound gains seen yesterday, returning focus back on major trend lows. Cable has dropped back to the 1.2050 area. The 31-month low, seen yesterday in Asian trading, is at 1.2015. On the Brexit front, there are intense debates and of backroom machinations at play, but little in the way of substantial developments. This will change when the UK parliament returns from its summer recess on September 2. A Reuters poll found a new high in the probability being ascribed by analysts for there being a no-deal Brexit, which is now pegged at 35%, up from 30% in the previous survey.

[USD, CHF]
EUR-CHF has printed a new 25-month low at 1-0865. 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 edged out a two-day high at 1.3252. Rekindled risk aversion in global markets has put the Canadian Dollar back onto a back foot, given the influence on oil prices. Although up from recent lows, front-month WTI prices are still showing about a 10% decline from month-ago levels. USD-CAD support comes in at 1.3207-10.