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By XE Market Analysis August 26, 2019 7:42 am
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    XE Market Analysis: North America - Aug 26, 2019

    Developments on the trade front inspired fresh volatility in forex markets today, which saw the Yen hit a 33-month high against the Dollar before turning quite sharply lower. Thin conditions prevailed in the absence of London markets. USD-JPY lifted back to the upper 105.0s after hitting a 33-month low at 104.45 in early Tokyo trading. News that President Trump claimed that China asked to return to the negotiating table and that Beijing called for a "calm" resolution in their trade disagreements helped restore risk appetite, which saw the Yen's safe haven premium unwind. The editor-in-chief of China's Global Times, Hu Xijin, subsequently tweeted that "Based on what I know, Chinese and US top negotiators didn't hold phone talks in recent days. The two sides have been keeping contact at technical level, it doesn't have significance that President Trump suggested." Elsewhere, EUR-USD dipped to the lower 1.1100s on a sub-forecast German Ifo index, which fell to 94.3 in August, the lowest since Nov 2012. The pair had been settled in narrow range trading around 1.1150 after rallying from the 1.1050 area on Friday on news that China announced 5-10% tariffs on an additional $75 bln of U.S. goods, and a fairly dovish, although non-committal speech, from Fed chair Powell. The PBoC set the Yuan's reference rate at a new 11-year-plus low.

    [EUR, USD]
    EUR-USD dipped to the lower 1.1100s on a sub-forecast German Ifo index, which fell to 94.3 in August, the lowest since Nov 2012. The pair had been settled in narrow range trading around 1.1150 after rallying from the 1.1050 area on Friday on news that China announced 5-10% tariffs on an additional $75 bln of U.S. goods, and a fairly dovish, although non-committal speech, from Fed chair Powell. Offsetting this are 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. The political situation in Italy is also on the worry list. Overall, we retain a bearish view of the pairing.

    [USD, JPY]
    USD-JPY lifted back to the upper 105.0s after hitting a 33-month low at 104.45 in early Tokyo trading. News that President Trump claimed that China asked to return to the negotiating table and that Beijing called for a "calm" resolution in their trade disagreements helped restore risk appetite, which saw the Yen's safe haven premium unwind. Further volatility is likely in the weeks and months ahead.

    [GBP, USD]
    Sterling last week posted a second consecutive up week against the dollar, the first time this has been seen since February. A downsizing in what has built up to be an extreme net short exposure to the pound after months of Brexit-related underperformance has been afoot over the last couple of weeks, which comes ahead of the UK parliament's return from summer recess on September 3. The most recent Reuters poll on Brexit, which was published earlier in the month, found that while the odds for a disorderly no-deal, no-transition period Brexit had risen to a median probability of 35%, the most probable outcome was still for a deal being struck. It is in this context that last week's upbeat remarks from Germany's Merkel triggered a buying reaction, although her comments were little more than platitudes; a stage-managed show of reasonableness. What's clear is that there isn't any sign that "alternative arrangements" proposals to the Irish border backstop guarantee would be satisfactory to Ireland and the EU as a means of ensuring that the Good Friday Peace Agreement isn't broken. The possibility for a general election hangs in the air, which would, even if it is held after October 31, boil down to a straight contest between an alliance of pro-EU parties and pro-Brexit parties. That may be the point at which Brexit is once and for all decided on.

    [USD, CHF]
    EUR-CHF has turned back under 1.0900 as risk-off conditions returned to global markets. 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 has firmed up today though remains below the three-day high the pair saw on Friday at 1.3339, which was just below the two-month high at 1.3345. The rekindling in risk aversion in global markets should, while it persists, underpin USD-CAD. The pair has support at 1.3270-73.

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