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By XE Market Analysis August 15, 2019 7:25 am
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    XE Market Analysis: North America - Aug 15, 2019

    A revival in risk-off positioning saw the Yen more than recover losses seen earlier in the day, while S&P 500 went from showing a 0.7% gain to a 0.6% loss in overnight trading. Beijing's vow to take "necessary countermeasures" rekindled investor anxiety, offsetting President Trump's decision to delay the latest earmarked tariffs to December from September. USD-JPY, after hitting a peak at 106.78, dove back to the 105.80 area. This is classic price action for this pairing amid phases of flip-flopping risk-off and risk-back-on sentiment shifts. The decline in safe government bond yields has the effect of increasing equity risk premiums, which some equity analysts have been highlighting as a reason behind recent dip-buying, though this view is increasingly being overwhelmed by an increased recession risk in major economies such as the the U.S. and Europe. An inversion of the U.S. yield curve, which appeared yesterday for the first time since 2007, has portended each recession the U.S. economy has seen since 1955. Elsewhere, EUR-USD was fairly stable, near 1.1150, after yesterday breaking free of a week-long period of narrowly orbiting the 1.1200 level. Sterling traded moderately firmer in the wake of the unexpected 0.2% m/m growth in UK July retail sales, which thwarted the median forecast for a 0.3% contraction, showing the dependable UK consumer has remained unperturbed by the threat of a no-deal Brexit. Cable climbed back above 1.2100, over 50 pips up on yesterday's closing levels. The Aussie Dollar also traded firmer, with an unexpectedly solid Australian employment report catalyzing a short-covering fuelled rally.

    [EUR, USD]
    EUR-USD has over the last day broken out of week-long orbit of the 1.1200 level, settling lower, around 1.1150 after pegging a low at 1.1130, which is a 10-day low. President Trump's partial de-escalation of his trade war with China catalysed some Dollar buying on the view that it would take the pressure off the Fed. We take a bearish view of EUR-USD given the ECB's course to easing in September and the risk of a no-deal Brexit, which in the event would be detrimental to the Eurozone economy. Any returned of risk-off trading in global markets may, at first, elicit Dollar selling should it imply a more aggressive Fed easing path, though such a backdrop may also increase demand for U.S. Treasuries, being the biggest and most liquid market for risk-free assets in the world, which in turn may buoy the greenback.

    [USD, JPY]
    A revival in risk-off position saw the Yen more than recovery losses seen earlier in the day, while S&P 500 went from showing a 0.7% gain to a 0.6% loss in overnight trading. Beijing's vow to take "necessary countermeasures" rekindle investor anxiety, offsetting President Trump's decision to delay the latest earmarked tariffs to December from September. USD-JPY, after hitting a peak at 106.78, dove back to the 105.80 area. This is classic price action for this pairing amid phases of flip-flopping risk-off and risk-back-on sentiment shifts. The decline in safe government bond yields has the effect of increasing equity risk premiums, which some equity analysts have been highlighting as a reason behind recent dip-buying, though this view is increasingly being overwhelmed by increased recession risk in major economies such as the the U.S. and Europe. An inversion of the U.S. yield curve, which appeared yesterday for the first time since 2007, has portended each recession the U.S. economy has seen since 1955.

    [GBP, USD]
    Sterling has traded moderately firmer in the wake of the unexpected 0.2% m/m growth in UK July retail sales, which thwarted the median forecast for a 0.3% contraction and showed the dependable UK consumers remains unperturbed by the threat of a no-deal Brexit. Cable climbed back above 1.2100, over 50 pips up on yesterday's closing levels, while EUR-GBP has carved out a one-week low at 0.9208. The Pound has been trading relatively steadily so far this week, despite a mix of bearish and bullish leads, suggesting that an equilibrium of sorts has been reached following a prolonged phase of underperformance. On the Brexit front, the scene is set for final showdown between anti-no-deal members of parliament and the pro-no-deal Brexiteers, which include Prime Minister Boris Johnson and his cabinet (who lead a weak minority government with a working majority of just one, and with a portion of their own Tory members disposed to stopping a no-deal eventuality, but who will be galvanized by some favourable polling). The battle will commence on September 3, when parliament reopens after the summer recess. The risk of a disorderly no-deal Brexit was given a median 35% probability of happening in the latest Reuters poll, up from 30% previously.

    [USD, CHF]
    EUR-CHF edged out a fresh 25-mont low at 1.0838 yesterday amid a renewed turn lower in equity markets and recession-portending inversions of the U.S. and UK yield curves, which fed safe haven demand for the Swiss currency (despite the punishing -0.75% deposit rate). We retain a bearish view of the cross given ECB's course to additional monetary stimulus in September, and the risk of a disorderly no-deal Brexit on October 31.

    [USD, CAD]
    USD-CAD printed an eight-day high at 1.3325 yesterday, which came amid a near 4% decline in oil prices. USD-CAD support comes in at 1.3207-10.

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