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By XE Market Analysis April 9, 2019 7:05 am
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    XE Market Analysis: North America - Apr 09, 2019

    The Dollar has been trading with a softening tilt. Sterling has been volatile on the back of Brexit-related news noise today, rallying quite sharply before falling back quite sharply. The drop came after EU's chief negotiator Barnier dismissed an unconfirmed report that Germany's Merkel was open to time-limiting the Irish backstop (which guarantees that an open border is maintained between Ireland and Northern Ireland), stating that negotiations will not be reopened on this front. Cable, after rallying by about 50 pips to a 1.3121 high, settled back around the 1.3070-80 area. EUR-USD, meanwhile, carved out a two-week high at 1.1280, making this the third consecutive up day the pair has seen. The new high today has largely been the product of general dollar softness. AUD-USD has concurrently gained, while USD-JPY and USD-CAD showed declines. There doesn't appear to be a specific catalyst, with the news churn to day so far focusing on Brexit and EU-China trade talks, the latter of which have reportedly been successful, along with President Trump's restating his threat to tariff U.S. imports of EU goods. Market participants are looking to tomorrow's release of U.S. March CPI data given that the Fed's recent dovish turn has been largely hinged on a benign outlook for inflation. We are expecting headline CPI to rise to 1.9% y/y, up from 1.5% in the month prior, though we see core CPI to remained unchanged at 2.1% y/y. On the Brexit front, UK government ministers are meeting with Labour counterparts amid ongoing efforts to find a cross-party compromise on Brexit. May is meeting with Germany's Merkel and France's Macron today, and will appear at the EU's emergency Brexit summit tomorrow.

    [EUR, USD]
    EUR-USD carved out a two-week high at 1.1280, making this the third consecutive up day the pair has seen. The new high today has largely been the product of general dollar softness today. Cable and AUD-USD are concurrently net higher, too, while USD-JPY and USD-CAD are concurrently showing declines. There doesn't appear to be a specific catalyst, with the news churn to day so far focusing on Brexit and EU-China trade talks, the latter of which have reportedly been successful, along with President Trump's restating his threat to tariff U.S. imports of EU goods. EUR-USD's gain has extended the rebound from the 1.1210 low seen in the wake of the U.S. jobs report last Friday, which revealed a blend of strong payrolls but tepid earnings growth, which supported Wall Street but pressured Treasury yields, and which in turn has kept a lid on the dollar. Market participants are looking to tomorrow's release of U.S. March CPI data given that the Fed's recent dovish turn has been largely hinged on a benign outlook for inflation. We are expecting headline CPI to rise 0.4% m/m in March, after a 0.2% reading in February, and to 1.9% y/y, up from 1.5% in the month prior, though we anticipate core CPI to remained unchanged at 2.1% y/y. Our forecasts match the respective median expectations. EUR-USD has resistance at 1.1282-85, which is being tested.

    [USD, JPY]
    USD-JPY has traded with a modest downside bias, which saw the pair carve out a one-week low of 111.23. This was seen against a backdrop of net steady stock markets in Asia, with investors turning cautious despite a fresh trend high being posted by the S&P 500 on Wall Street yesterday, in what was an eight consecutive session of gains, which is the longest uninterrupted rally phase since October 2017. A combo of high valuations, President Trump's threat to tariff European goods, Brexit, expectations for a contraction in Q1 corporate earnings in the U.S., and upcoming meetings, due later today, between the EU and China on trade, have collectively given reason for cautious in equity markets. Market participants are also looking ahead to tomorrow's release of U.S. CPI data for March given the Fed's dovish-turn phase has been hinged on a benign inflation outlook. We expect USD-JPY to continue with a downside bias for now. Support comes in at 110.88-95.

    [GBP, USD]
    Sterling has been volatile on the back of Brexit-related news noise today, rallying before crashing. The drop came after EU's chief negotiator Barnier dismissed an earlier unconfirmed report that Germany's Merkel was open to time-limiting the Irish backstop, stating that negotiations will not be reopened on this front. Barnier had also stated yesterday that in the event that the UK leaves the EU without a deal that any future trade deal would be contingent on the UK honouring the Irish backstop (to guarantee that an open border is maintained between Ireland and Northern Ireland). Cable, after rallying by about 50 pips to a 1.3121 high, turned sharply lower, back to levels around the 1.3070-80 area. On the Brexit front, UK government ministers are meeting with Labour counterparts amid ongoing efforts to find a cross-party compromise on Brexit. The potential compromise is one that would take the form of May's Withdrawal Agreement plus a guarantee the UK would remain in the EU's customs union in the future, which would both satisfy Labour demands while obviating the need for an Irish backstop. But, so far, there is little sign that substantive progress is being made. Sources cited by the BBC suggest that Prime Minister May has not, thus far, accepted Labour's demand for customs union membership. If the talks were to succeed, then the UK would be set to leave on May 22, ahead of European Parliament elections on May 23. If the talks fail, May has committed to putting in a series of Brexit options to Parliament, though clearly a further delay in Brexit will be needed for this. If these options in turn fail to produce a consensus, then a referendum or general election may be the only viable ways forward. May is travelling to the continent today for meetings with Germany's Merkel and France's Macron. She is then due to appear at the EU's emergency Brexit summit tomorrow. As things stand, the UK is due to exit the EU on Friday, April 12, at 23:00 London time without a deal in place. We -- and judging by the stability of the pound, markets -- don't expect a no-deal to happen; Parliament isn't countenancing it, while Brussels can be expected to be flexible -- so long as the UK persuades it that there is a way forward and there isn't a "permanent standoff" in Westminster.

    [USD, CHF]
    EUR-CHF has settled above 1.1200 after rebounding last week from the eight-month low seen in late March at 1.1162. The rotation higher reflected broader Euro gains. SNB member Maechler said last week that while the Swiss economy remains dynamic and the global economy should remain solid, inflation pressures remain very weak and the environment is fragile, which continues to warrant expansionary monetary policy. The EUR-CHF cross has been seeing choppy directional impulses since the start of the year, often times characterized by bouts of pronounced underperformance in the Swiss franc that have often been accompanied by talk/suspicions of SNB intervention.

    [USD, CAD]
    USD-CAD has rotated lows concomitantly with new trend highs in oil prices. Front-month WTI crude prices printed a five-month high at $64.76. Military tension in Libya have been the latest bullish catalyst, which comes amid a backdrop fo OPEC supply curtailment and U.S. sanctions against Venezuelan and Iranian crude exports. WTI benchmark oil prices are now up by nearly 42% on the year-to-date, which, if sustained, will be a notable benefit to Canada's terms of trade. USD-CAD has dropped sharply over the last day, and today extended to a fresh low, at 1.3304, which is the lowest level seen since last Wednesday. More of the same looks likely. Resistance comes in at 1.3335-38.

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