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By XE Market Analysis August 15, 2018 7:32 am
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    XE Market Analysis: North America - Aug 15, 2018

    The Dollar has posted broad gains amid a backdrop of rekindling risk aversion. Turkey's Erdogan escalated the confrontation with the U.S. by announcing tariffs on U.S. cars, alcohol and cigarettes. Chinese stocks came under pressure again, with the Shanghai Composite closing 2.1% for the worse, and the PBoC set the USD-CNY reference rate at 6.8856, the highest since May 2017, up from yesterday's fixing at 6.8695. Both the Bank of Indonesia and the HKMA have intervened to support their respective currencies. Stock markets in Europe dove into the red after a short-lived opening rally, while commodity prices came under notable pressure, with copper futures showing a loss of over 2.5%, for instance, reflecting a broader risk-off theme in global markets and concerns about emerging market contagion. The USD index (DXY) posted a 14-month high at 96.92 while EUR-USD concurrently printed a 13-month low at 1.1310. Cable traded below 1.2700 for the first time since June 2017, and AUD-USD fell to its lowest levels since January 2017. USD-JPY posted an eight-day high of 111.43 during the Tokyo session before turning back toward 111.00 as Yen safe-haven demand picked up.

    [EUR, USD]
    EUR-USD has remained heavy after printing a 13-month low at 1.1316, which came amid a broad bid for Dollars, with the U.S. currency seen as a safe bet in prevailing uncertain times. We advise market participants to remain at their weather stations: Aside from Turkey's plight, and the flash of contagion across the globe this week, there are concerns about an escalating trade war involving the U.S., China, Japan and the EU -- economies that form the major chunk of world GDP. 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 (despite the recent turmoil in global markets we still expect two more 25 bp hikes in the Fed funds rate this year, one in September and another in December). EUR-USD has resistance at 1.1425.

    [USD, JPY]
    USD-JPY has settled around 111.30 after posting an eight-day high of 111.43 during the Tokyo session amid a broader bid for the Dollar. A weakening in stock markets in Asia, where the MSCI Asia-Pacific ex-Japan hit a one-year low, capped gains. There remains concerns about emerging markets, with Turkey's Erdogan escalating the confrontation with the U.S. by announcing tariffs on U.S. cars, alcohol and cigarettes. Chinese stocks came under particular pressure again, with the Shanghai Composite closing down by 2.1%, and the PBoC set the USD-CNY reference rate at 6.8856, the highest since May 2017 and up from yesterday's fixing at 6.8695. Both the Bank of Indonesia and the HKMA have intervened to support their respective currencies. 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. The Trump administration is mulling a tariff hike on $200 bln of Chinese imports, which may be confirmed later this month or early next. Trump perceives the advantage in the trade war to be his given the U.S. trade deficit with China, and given the U.S. economy is motoring and given that Trump, such as his proclivities are, will want to look strong before his base going into the midterm elections in November. At the same time, Beijing is not likely to yield, and is looking to be playing the long game, waiting to see how the chips fall for Trump at the November midterms. USD-JPY has support at 110.28-30.

    [GBP, USD]
    Sterling turned higher after initially ticking lower in the wake of UK July inflation data, as markets focused on the unchanged core CPI reading while overlooking the unexpected tick higher in headline CPI. The flat core CPI reading suggests that domestically-generated inflationary pressures, which the BoE is playing close attention to, remain contained. UK July CPI came in slightly warmer than expected at 2.5% y/y in the headline reading, up from 2.4% y/y in June. The median forecast had been for an unchanged 2.4% reading. The rise was driven by higher petroleum prices while July core CPI came in at 1.9% y/y, unchanged from June and meeting the consensus expectation. At 1.9% y/y the core CPI figure is the lowest level it has been since March 2017. Before the inflation data was released, Cable had posted a 14-month low of 1.2691 before settling in the lower 1.2700s. The pair subsequently dipped to a low of 1.2697 in the wake of the CPI figures before settling around the 1.2720 mark. We expect the pound to remain heavy, with a bias to making new lows due to political and associated Brexit-related uncertainty. UK foreign secretary Jeremy Hunt became the latest senior government member to express concern that a Brexit deal with the EU may not be reached. Cable has initial resistance at 1.2735.

    [USD, CHF]
    EUR-CHF has recouped to around the 1.1300 level after making a one-year low at 1.1266. The stabilization of the Turkish Lira afforded the opportunity for the Euro to recover a footing, given the exposure of European banks to Turkey, though market participants remain on edge with Turkey's Erdogan escalating the standoff with the U.S. by announcing tariffs on some U.S. imports. EUR-CHF has resistance at 1.1368-70, which encompasses the May low, which had been the base of a broadly sideways range that had been in play since August 2017.

    [USD, CAD]
    USD-CAD found support at yesterday's three-session low at 1.3050 amid a broad bid for U.S. Dollars. President Trump's threatened tariffs on Canadian made cars, in a tweet late Friday as reported by the WSJ, if a deal is not struck with Canada on NAFTA. Any sure signs of progress on the NAFTA front would likely spark a rebound in the Canadian Dollar, as the uncertainty about the re-negotiation has seen a discount being build into the currency. USD-CAD has support at 1.3050 and resistance at 1.3108-10.a

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