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By XE Market Analysis August 16, 2019 7:27 am
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    XE Market Analysis: North America - Aug 16, 2019

    EUR-USD has declined for a fifth consecutive day, earlier pegging a two-week low at 1.1074. A stop-loss and long-covering decline in EUR-GBP, which has fallen by nearly 1%, has driven a broader underperformance in the Euro. EUR-USD's ebb today has extended the fall the pairing saw following yesterday's firmer than expected U.S. retail sales and productivity data, which tipped the balance of Fed versus ECB easing expectations a little (especially with ECB's Rehn arguing for "impactful and significant" stimulus in a WSJ interview). Sterling rallied again, with participants downsizing what has been an extreme net short exposure. Cable printed an eight-day high at 1.2169 while EUR-GBP has exceeded its prior day low for what is now a fifth consecutive day, putting the cross in two-week low territory. Elsewhere, the Yen has seen some of its safe haven premium unwind amid a backdrop of rising sovereign bond yields, solid rebound on European equity bourses and with S&P 500 surging by 1%, pointing to a strong opening rally on Wall Street. USD-JPY vaulted back to near 106.50, nearly 50 pips up on the Tokyo low. AUD-JPY and other yen crosses have also posted gains, though most remain below recent highs, as has USD-JPY.

    [EUR, USD]
    EUR-USD has declined for a fifth consecutive day, earlier pegging a two-week low at 1.1074. A stop-loss and long-covering decline in EUR-GBP, which has fallen by nearly 1%, has driven a broader underperformance in the Euro. EUR-USD's ebb today has extending the fall the pairing saw following yesterday's firmer than expected U.S. retail sales and productivity data, which tipped the balance of Fed versus ECB easing expectations a little (especially with ECB's Rehn arguing for "impactful and significant" stimulus in a WSJ interview). We have been advocating 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. And while any return of risk-off trading in global markets may initially elicit Dollar selling should it imply a more aggressive Fed easing path, 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]
    The Yen has seen some of its safe haven premium unwind amid a backdrop of rising sovereign bond yields, solid rebound on European equity bourses and with S&P 500 showing a near 1% gain, pointing to a strong opening rally on Wall Street. USD-JPY has vaulted back to near 106.50, which is nearly 50 pips up on the Tokyo low. AUD-JPY and other Yen crosses have also posted gains, though most remain below recent highs, as has USD-JPY. The Japanese currency has seen a choppy week and will remain prone to volatility should there be continued flip-flopping between risk-off and risk-back-on sentiment, which seems likely as hopes for more central bank stimulus vie with fears that a number of major economies are simultaneously heading for recession, and with a number of Dollar-indebted developing-world economies particularly exposed to the shift in the financial cycle. Given these fears, further conciliatory remarks are likely from both China and the U.S. with regard to their trade spat, which may help maintain investor spirits and keep USD-JPY underpinned -- for now.

    [GBP, USD]
    Sterling has rallied again as participants downsize what has been an extreme net short exposure to the currency. Cable printed an eight-day high at 1.2169 while EUR-GBP has exceeded its prior day low for what is now a fifth consecutive day, putting the cross in two-week low territory. If the pound makes through to today's close above 1.2028-30, which looks likely, this would mark this week as the first up week in the last five. The UK currency is also on course to post its first up week versus the euro out of the last 15 weeks. Above-forecast retail sales, inflation and average pay data out of the UK this week have had the effect of turning down the anxiety dial with regard to the state of the UK economy, although it still looks to be headed for at least a mild recession with the Brexit process presenting significant uncertainty and a risk of a disorderly no-deal departure from the EU. Regarding Brexit, 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 1.0835 yesterday amid volatility 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 nine-day high at 1.3339 yesterday, which came amid sharp oil price declines and after above-forecast U.S. retail sales and productivity data. USD-CAD support comes in at 1.3207-10.

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