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By XE Market Analysis August 10, 2018 7:24 am
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    XE Market Analysis: North America - Aug 10, 2018

    EUR-USD recovered to the upper 1.1400s after dropping sharply into the London interbank open, leaving a 13-month low at 1.1432. Even at levels around 1.1475-80 the pair was still showing a loss of nearly 0.5% on the day. The move was largely fuelled by a strong rally in the Dollar, which is being widely viewed as a safe haven amid a run-to-the-hills bout of risk aversion in global markets, though the Euro, along with Sterling, came under particular pressures as the Turkish Lira's crashed to new record lows, which in turn came amid reports that the ECB's supervisory arm has raised concerns about the exposure of European banks to Turkish assets. Turkey's 10-year benchmark bond yield spiked above 20% today. Russia's Rouble also fell sharply, to two-year lows, as a consequence of the U.S. sanction threat. All this has been concurrent with deepening concerns about an escalating trade war. USD-JPY recovered to the 111.00 area after posting a two-week low at 110.61, buoyed by broad Dollar demand, though Yen crosses traded lower as the Japanese currency outperformed most other currencies as market participants bid for safe havens. Data today out of Japan included an above-forecast Q2 GDP outcome, which rose 0.5% q/q, above the median forecast for a 0.3% q/q rise, though the June tertiary index (service sector) contracted by 0.5% m/m, below the median forecast for a 0.3% m/m decline. Cable dove to a fresh one-year low of 1.2734 before finding a footing, settling above 1.2750 but still nursing a loss of about 0.5% on the day. UK GDP and industrial production met expectations, with preliminary Q2 growth coming in at 0.4% q/q and 1.3% y/y, while industrial output expanded by 0.4% m/m.

    [EUR, USD]
    EUR-USD recovered to the upper 1.1400s after dropping sharply into the London interbank open, leaving a 13-month low at 1.1432. Even at levels around 1.1475-80 the pair was still showing a loss of nearly 0.5% on the day. The move was largely fuelled by a strong rally in the Dollar, which is being widely viewed as a safe haven amid a run-to-the-hills bout of risk aversion in global markets, though the Euro, along with Sterling, came under particular pressures as the Turkish Lira's crashed to new record lows, which in turn came amid reports that the ECB's supervisory arm has raised concerns about the exposure of European banks to Turkish assets. Turkey's 10-year benchmark bond yield spiked above 20% today. Russia's Rouble also fell sharply, to two-year lows, as a consequence of the U.S. sanction threat. All this has been concurrent with deepening concerns about an escalating trade war, along the impact of U.S. sanctions on Turkey and Iran. Beijing today doubled down in the face of domestic criticism about its stance in the trade spate with the U.S. There has been a dominant view in markets that the U.S. currency will tend to firm as trade tensions with China ratchet higher. We 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 June's low at 1.1508 has now reverted to a resistance level.

    [USD, JPY]
    USD-JPY recovered to the 111.00 area after posting a two-week low at 110.61, buoyed by broad Dollar demand, though Yen crosses traded lower as the Japanese currency outperformed most other currencies as market participants ran to safe havens amid a sharp souring in risk appetite. Data today out of Japan included an above-forecast Q2 GDP outcome, which rose 0.5% q/q, above the median forecast for a 0.3% q/q rise, though the June tertiary index (service sector) contracted by 0.5% m/m, below the median forecast for a 0.3% m/m decline. We still retain a bearish view of USD-JPY as we expect the Sino-U.S. trade war to continue to escalate, which in turn should raise the Yen's safe haven premium. China's principal newspaper, a conduit for the official government line, refuted domestic criticism about Beijing's stance in the trade war with the U.S., remarking that "an elephant can't hide." 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. Resistance is at 111.50-52.

    [GBP, USD]
    Cable dove to a fresh one-year low of 1.2734 before finding a footing, settling above 1.2750 but still nursing a loss of about 0.5% on the day. Reports of UK banks exposure to Turkish markets, which are descending further into turmoil, weighed on the Pound today, while the Dollar outperformed notably. The Pound has concurrently recouped some lost ground against the Euro. Cable is set to make this the fifth consecutive week of declines. Political uncertainty has soured sentiment, lifting the Brexit-risk discount being asked of the UK's currency. Former foreign secretary Boris Johnson looks to be scheming to make a leadership challenge on Prime Minister May, adding to the growing concern that the UK could leave the EU next March without a new agreement on trade or other issues having been agreed on. A no-deal exit would mean trade with the EU would revert to WTO rules, and while hard Brexiteers think this is a workable solution their optimism evidently isn't being matched by currency markets, which see such a scenario as being costly for both the UK and EU. Cable has trend support at 1.2745. UK GDP and industrial production met expectations, with preliminary Q2 growth coming in at 0.4% q/q and 1.3% y/y, while industrial output expanded by 0.4% m/m.

    [USD, CHF]
    EUR-CHF has been pulled lower by EUR-USD, with the cross now down for a third consecutive day, logging a 10-week low at 1.1402. The May low at 1.1368 provides a downside waypoint, marking the base of a broadly sideways range that's been unfolding since August 2017. The low today is the new nadir of a retreat from the two-month high that was posted in mid July at 1.1714.

    [USD, CAD]
    USD-CAD has lifted for a second day amid broad rally in the U.S. buck, but also following a sharp retreat in oil prices, which provides a bearish lead for the Canadian Dollar. Support comes in at 1.3008-10, and resistance at 1.3100-05. Canada releases the July employment report today, we expect a 15.0k headline gain (median 20k) following the 31.8k gain in June. The unemployment rate is seen slipping to 5.9% after perking up to 6.0% in June from the 40-year low 5.8% in May. Total average hourly earnings are seen rising at a 3.7% y/y rate in July from the 3.6% clip in June, but still short of the 3.9% growth rate of May.

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