Home > XE Currency Blog > XE Market Analysis: North America - Aug 23, 2017

AD

XE Currency Blog

Topics4596 Posts4641
By XE Market Analysis August 23, 2017 7:43 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 3128
    XE Market Analysis: North America - Aug 23, 2017

    The dollar traded softer versus the main European currencies and the yen, though held up better against the Canadian dollar and other commodity currencies. The euro outperformed concomitantly with a rise in Bund yields following Eurozone PMI data, with the surveys showing an unexpected improvement to a reading to 57.4 in the composite flash reading for August, up from 56.6 in July. EUR-USD sprang upwardly by some 50 pips, to a peak-so-far of 1.1794. EUR-CHF lifted above 1.1400 and EUR-JPY jumped by around 50 pips. EUR-GBP hit an eight-year peak of 0.9214. The solid PMI data have rekindled the market narrative for ECB President Draghi to use his appearance at the Jackson Hole gathering on Friday to lay the groundwork for QE tapering. USD-JPY clocked a four-session high at 109.82 before retreating back under 109.50. Cable has logged an eight-week low at 1.2791.

    [EUR, USD]
    EUR-GBP hit an eight-year peak of 0.9214 following the solid Eurozone PMI data. Euro outperformance is only half the story, however, as the pound has come under pressure against other currencies. Cable has logged an eight-week low at 1.2791, and GBP has ebbed to a three-session low, nearing last Friday's two-month low at 139.79. The recovery toward post-crisis normalcy in the Eurozone economy juxtaposed to the post-Brexit vote underperformance in the UK economy have been driving EUR-GBP higher. The cross has risen by over 17% from levels that were prevailing ahead of the Brexit vote last June. Tomorrow's release of second estimate UK Q2 GDP data is likely to be confirmed at +0.3% q/q -- half the Eurozone growth figure for the same quarter. We continue to take a bearish view with the Brexit process shaping up to be far from smooth, detrimental to business and investment planning, while inflation-adjusted average household incomes are, and are likely to remain, in decline.

    [USD, JPY]
    USD-JPY clocked a four-session high at 109.82 before retreating back under 109.50. Market participants remain noncommittal ahead of gathering of central bankers at the Jackson Hole symposium, which begins tomorrow and is a venue for potentially market-moving policy signalling. We think the bias of the pairing will be to the downside given lingering anxieties about North Korea and the U.S. political situation. USD-JPY has support at 108.60-63 (which encompasses the recent lows), while resistance is at 110.00.

    [GBP, USD]
    The euro lifted on the Eurozone PMI data, concomitantly with Bund yields, with the survey showing an unexpected improvement to a reading to 57.4 in the composite flash reading for August, up from 56.6 in July. EUR-USD sprang upwardly by some 50 pips, to a peak-so-far of 1.1794. EUR-CHF lifted above 1.1400 and EUR-JPY jumped by around 50 pips. EUR-GBP hit an eight-year peak of 0.9214. The solid PMI data have rekindled the market narrative for ECB President Draghi to use his appearance at the Jackson Hole gathering on Friday to lay the groundwork for QE tapering. EUR-USD's upside will likely be curtailed into the Jackson Hole gathering of central bankers, with focus now on whether Draghi will hint at policy tapering at his speech on Friday.

    [USD, CHF]
    The Swiss franc etched out fresh lows versus both the euro and dollar. EUR-CHF and USD-CHF both lifted to respective one-week highs 1.1397 and 0.9698, extending the recovery from last Friday's three-week low at 1.1259 in the case of the former. We advise caution with regard to EUR-CHF, seeing near-term downside risk as we don't expect to ECB President Draghi to use the Jackson Hole venue as a place to lay the groundwork of QE tapering, seeing that the timing remains premature given tepid inflationary pressures and policymaker concerns about the strength of the euro. This would likely be taken as a euro selling cue by markets. EUR-CHF resistance is at 1.1405-07, and in USD-CHF at 0.9705. In the bigger picture, we remain bullish of EUR-CHF. Assuming the Eurozone economic revival remains on track, which would help quell policymaker angst about euro gains, and assuming the ECB commits to QE policy tapering (which we think will be by October), we expect the EUR-CHF to eventually recover to the SNB's former floor level at 1.2000.

    [USD, CAD]
    USD-CAD lifted to the upper 1.25s after logging a three-week low at 1.2525 yesterday. A recovery in the U.S. dollar and softer oil prices this week gave the pairing a prop. We continue to favour the downside in USD-CAD, however, anticipating relative outperformance of the Canadian economy, which we expect to come in at 3.7% q/q (saar) in Q2 and 3.0% for the year. This is coming with the drag from historic low oil prices in recent years having now passed. We expect the BoC to make a second 25 basis point rate hike in October, which would take the policy rate to 1.00%, and we see two more 25 basis point rate increases next year.

    Paste link in email or IM