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By XE Market Analysis August 8, 2018 7:21 am
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    XE Market Analysis: North America - Aug 08, 2018

    There have been several themes at play so far today, one being a Dollar recovery from lows, another being a sharp decline in the Pound, and another being Yen outperformance. To start with Sterling, as it has been the biggest mover, Cable plunged over a big figure to one-year lows under 1.2875, while the Pound concurrently dove to a nine-month low versus the Euro and an 11-month low against the Yen. Markets are demanding a bigger Brexit discount in Sterling on heightening concerns that the British government will be unable to find enough common ground with the EU to agree a new trading deal by the time the UK leaves the Union next March. The Yen, meanwhile, picked up some safe-haven bids as risk appetite in European stock markets flagged with markets digesting the latest escalation in the Sino-U.S. trade war -- the U.S. announcing tariffs on a further $16 bln of Chinese imports -- which deflated some of the momentum behind a global stock rally that had been underpinned by stellar U.S. corporate earnings and hopes for fiscal stimulus in China. This has seen USD-JPY break lower after four straight sessions trading on 111 handle, with the pair posting a nine-day low at 110.83. AUD-JPY, CAD-JPY and GBP-JPY, posted declines of 0.5% or more. EUR-USD turned lower during the London AM session after posting a four-session high of 1.1628 during the pre-Europe session in Asia. The high was seen as the USD index (DXY) corrected for a second day after rallying for much of the previous week, though the Dollar subsequently rebounded some as risk appetite soured.

    [EUR, USD]
    EUR-USD turned lower during the London AM session after posting a four-session high of 1.1628 during the pre-Europe session in Asia. The high was seen as the USD index (DXY) corrected for a second day after rallying for much of the previous week (in the wake of the Fed's upgrade on growth to "strong" from "solid"). There is a view in markets that the U.S. currency will tend to firm as trade tensions with China ratchet higher, and while a lift in global stock markets has cooled this narrative, a fresh escalation in the trade way (the U.S. announced tariffs on an additional $16 bln of Chinese imports, effective August 23) could rekindle risk aversion. We still remain bearish of EUR-USD. The relative strength of the U.S. economy should be showcased by incoming data, which in turn should girder the Fed's course to further tightening (we expect two more 25 bp hikes in the Fed funds rate this year, one in September and another in December). Market participants are also facing two wildcards in Europe that carry potential to disrupt the EU applecart; one stemming from the evolving populist political landscape in Italy, and another being the palpable risk for there being a no-deal Brexit scenario. EUR-USD has resistance at 1.1650-52. The June low at 1.1508, which is the lowest level seen since July 2017, provides a downside waypoint.

    [USD, JPY]
    The Yen has picked up some safe-haven bids as risk appetite in European equity markets flags with markets digesting the latest escalation in the Sino-U.S. trade war, deflating the momentum behind a global stock rally that had been underpinned by stellar U.S. corporate earnings and hopes for fiscal stimulus in China. This has seen USD-JPY break lower after four straight sessions trading on 111 handle, with the pair posting a nine-day low at 110.83. The biggest movers out of the main Yen crosses have been AUD-JPY, CAD-JPY and GBP-JPY, with declines of 0.5% or more on the day. USD-JPY has a series of daily lows that were seen during the latter part of July between 110.58 and 110.76, which now mark a key support zone.

    [GBP, USD]
    Sterling has taken a big whack, which has sent Cable to one-year lows under 1.2875, dropping over a bid figure from yesterday's closing level. The Pound has concurrently dove to a nine-month low versus the Euro and an 11-month low against the Yen. The losses today mark an acceleration in what has now been five consecutive weeks of losses in the case of Cable, which in turn marks the latest down phase in a bear trend that's been evolving since mid April (from levels near 1.4400). Markets are demanding a bigger Brexit discount in Sterling, which we estimate to have been 10-15% in trade-weighted terms since the vote to leave the EU in June 2016. The discount has taken another ratchet after a senior government member said this week that the odds for a no-deal Brexit are now higher than the odds are for achieving a new deal. This comes with Prime Minister May's government having become firmly stuck between a rock and a hard place, with most EU leaders backing the European Commission in rejecting much of British government's Brexit plan while a sizeable minority of May's Tory party think that the plan concedes too much to the EU. This raises the possibility for there being another referendum, while both the EU and UK have issued contingency-planning advice for a no-deal scenario. We advise trend following with regard to Cable while keeping a weather eye on Brexit developments. The August 2017 low at 1.2774 provides a downside waypoint.

    [USD, CHF]
    EUR-CHF has rebounded above 1.1550 after printing a six-week low of 1.1498 on Monday, which extended a decline that was started by the dovish-tilting policy guidance of ECB President Draghi in July. The low is the nadir of a retreat from the two-month high that was posted in mid July at 1.1714. This cross still remains in a broadly sideways range that's been evolving since late May, which is a similar pattern that EUR-USD has been seeing.

    [USD, CAD]
    USD-CAD jumped back above 1.3000 after printing a near two-month low at 1.2962 yesterday. The stalling of the recent oil price rebound, coupled with the evident strong prevailing fundamentals of the U.S. economy, which is underpinning expectations for the Fed to hike two more times before the year is out, has given reason to buy USD-CAD on dips. Support comes in at 1.3009-10, and resistance at 1.3100.

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