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By XE Market Analysis August 9, 2018 7:23 am
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    XE Market Analysis: North America - Aug 09, 2018

    The Dollar lifted during the London AM session, with the USD index (DXY) having reversed most of the decline it posted yesterday in making an intraday peak of 95.35. EUR-USD concurrently fall back under 1.1600 to an intraday low of 1.1576 low, which puts in some distance from yesterday's five-session peak at 1.1628, though the pair still remained comfortably above yesterday's low at 1.1551. Specific, sharp weakness in both Turkey's Lira and Russia's Rouble today have lent some support to the Dollar, with both currencies reeling from U.S. sanctions, developments which chimes with a market narrative that the U.S. currency will be apt to outperform as an indirect consequence of the Trump administration's shake-up on trade and the imposition of sanctions on Iran, Russia and Turkey. The Dollar, meanwhile, has posted a fresh one-year low against the Brexit-afflicted Pound, and has hit 28-month highs against the NZ Dollar, which has sharply underperformed today following more dovish than expected monetary policy guidance by the RBNZ. As for the Euro, the populist coalition government of Italy's government also remains a potential concern, warranting some factoring by currency overlay managers. The worsening in the U.S. twin deficits (budget and currency account) are a potential negative for the Dollar, but, as in previous periods of ballooning deficits, are not likely to be relevant so long as the U.S. economy continues to motor on and American corporations perform strongly.

    [EUR, USD]
    EUR-USD has settled below the five-session peak that was seen yesterday at 1.1628. There is a view in markets that the U.S. currency will tend to firm as trade tensions with China ratchet higher, and while the recent lift in global stock markets has cooled this narrative, a fresh escalation in the trade way could rekindle risk aversion and demand for the U.S. currency. 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 1.1597-00. The June low at 1.1508, which is the lowest level seen since July 2017, provides a downside waypoint.

    [USD, JPY]
    USD-JPY recovered above 111.0 during the London AM session after printing a two-week low at 110.70 during the Tokyo session. EUR-JPY and other yen crosses have seen a similar down-and-up price action. A 2% rally in the main Chinese equity indexes helped lift risk appetite in broader markets, hinged partly on expectations for fiscal stimulus and partly on Beijing's announcement of a new government body to oversee the development of the nation's tech sector. This backdrop saw the Yen's safe haven premium unwind a little. Overall, for USD-JPY, we still place greater odds for there being a downside breakout that a sustained rally as we expect the Sino-U.S. trade war to continue to escalate. 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]
    Cable printed a fresh one-year low at 1.2842, and has since recouped to around the 1.2860 mark. The Pound has also posted fresh 10- and 11-month lows versus the Euro and Yen, respectively. In inflation-adjusted trade weighted terms the pound is now trading just over 15% below levels that were prevailing ahead of the vote to leave the EU in June 2016. Recent losses have reflected a growing concern that the fragile and divided British government won't be capable of hammering out a new agreement for a future relationship with the EU, which for its part has collectively indicated that it will reject much of the UK's proposals, as they stand (negotiations will re-start in earnest next week). This raises the spectre of the UK leaving the EU next March without a new agreement and without sufficient bureaucratic or logistic preparedness (over a whole host of things ranging from customs to security issues, with the police warning yesterday, for instance, that the UK would lose access to EU-wide security powers and databases in a no-deal scenario). A no-deal exit, which we still as unlikely, would also mean trade with the EU would revert to WTO rules, which most economists see as being costly for both the UK and EU.

    [USD, CHF]
    EUR-CHF has been re-established above 1.1500 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 has dropped back to the lower 1.3000s after posting a two-week high at 1.3126 yesterday. We advise buying USD-CAD given the renewed pressure on oil prices and given 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. Support comes in at 1.3008-10, and resistance at 1.3100.

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