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By XE Market Analysis December 4, 2018 7:16 am
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    XE Market Analysis: North America - Dec 04, 2018

    The main movers today have been the Dollar, which has declined concomitantly with Treasury yields as markets recalibrate the Fed policy outlook, the Yen, which has attracted a safe-haven bid as the U.S.-China "truce" trade faded and global stocks turn lower, and Sterling, which spurted about a big figure higher versus the Dollar on Brexit-related news. EUR-USD lifted by over 0.5% in printing an 11-day high of 1.1418, buoyed by underperformance in the U.S. currency. While the potential of the U.S. currency has waned, we still don't advise bullish trend-following strategies for EUR-USD given concerns about the Eurosceptic populist movement gripping parts of the Eurozone along with softer inflation and signs of flagging growth momentum in the Eurozone economy. The Eurogroup backed the European Commission's assessment that Italy is in serious breach of the bloc's fiscal rules. USD-JPY declined by over 0.8% in posting an 11-day lows under 112.75, which extends a fall from last week's peak at 114.03. EUR-JPY, AUD-JPY and other Yen crosses concurrently declined, although by lesser magnitudes. Cable rallied by big figure to a three-session high of 1.2840 while EUR-GBP fell by nearly 50 pips in making a low at 0.8889. The Pound's gains were sparked by a report suggesting that the UK should be able to unilaterally revoke Article 50 and remain in the EU if it so desires. BoE Governor Carney also reaffirmed that the UK finance sector is prepared for, and will survive, any Brexit scenario -- including a disorderly no-deal scenario. Elsewhere, China’s Yuan hit a two-month high against the Dollar.

    [EUR, USD]
    EUR-USD lifted by over 0.5% in printing an 11-day high of 1.1418. A decline in U.S. Treasury yields has driven Dollar underperformance, lifting EUR-USD. Treasury yields have been declining as markets price in a shifting hawkish Fed outlook, where the combination of a likely rate hike in December but more dovish outlook contributed to a sharp curve flattener and inversion of the 3s-5s spread yesterday. This backdrop should now greatly curtail the upside potential of the U.S. currency, though we still don't advise bullish trend-following strategies for EUR-USD given concerns about the Eurosceptic populist movement gripping parts of the Eurozone (the Eurogroup today backed the Commission's assessment that Italy is in serious breach of the bloc's fiscal rules), along with softer inflation and signs of flagging growth momentum in the Eurozone economy. The final reading of the Eurozone's November manufacturing PMI, released yesterday, came in at 51.8, up from preliminary estimate of 51.5, but still down from 52.0 in October and the lowest reading since August 2016. EUR-USD has been in a bear trend since April, although downside momentum has abated in recent weeks concomitantly with the fading Fed's tightening cycle. EUR-USD has support at 1.1359-61, and resistance at 1.1439-42.

    [USD, JPY]
    USD-JPY declined by over 0.8% in posting an 11-day lows under 112.75, which extends a fall from last week's peak at 114.03. A combo of broad Dollar weakness and broader Yen strength has driven the move today. EUR-JPY, AUD-JPY and other Yen crosses have concurrently declined, although by lesser magnitudes. The dynamic reflects lower U.S. Treasury yields as markets price in a less hawkish Fed outlook, where the combination of a likely rate hike in December but more dovish outlook contributed to a sharp curve flattener and inversion of the 3s-5s spread yesterday, along with a turn back to risk aversion in global markets as doubts about the U.S.-China trade "truce" sink in. Regarding the U.S.-China situation, there were discrepancies between the post-G20 statements and follow-up remarks from the U.S. and China, with the latter's feedback looking woolly, lacking concrete action points, which is stirring concerns, driving most Asian equity markets, and U.S. index futures, lower today. Japanese stock losses were exacerbated by the strong Yen, which saw the Nikkei 225 closed with a 2.3% loss, while the likes of South Korea's KOPSI and Australia's ASX finished with respected declines of 0.8% and 1.0%. China's SSE still manged a 0.4% rise. China’s Yuan hit a two-month high versus the generally softer Dollar. USD-JPY has resistance at 113.34-35 and support at 113.00.

    [GBP, USD]
    Cable rallied by big figure to a three-session high of 1.2840 while EUR-GBP fell by nearly 50 pips in making a low at 0.8889. The Pound's gains were sparked by a report suggesting that the UK should be able to unilaterally revoke Article 50 and remain in the EU if it so desires. This is the non binding opinion by the Advocate General of the EU's Court of Justice, and has been taken as a buying cue it suggests there is a way back for the UK if there is a second referendum on EU membership, and if the public then decides to remain (even though EU leaders have repeatedly stated that the door remains open for the UK to reverse the Brexit process). BoE Governor Carney also made a speech earlier, where he repeated that the UK finance sector is prepared for, and will survive, any Brexit scenario -- including a disorderly no-deal scenario. The pound still remains down by an average 1.8% versus the dollar, euro and yen from month-ago levels and is maintaining what we estimate to be a 12-14% Brexit-related discount in trade-weighted terms relative to what would have been likely levels had the 2016 EU vote been in favour of remaining in the union. The major focus in the UK is on the House of Commons vote on the Brexit deal, next Tuesday. It still looks likely to be voted down, despite the best efforts of Prime Minister May and her allies to sell it. If it is voted down, and if PM May is taken down by a parliamentary no confidence vote, then a new general election will be on the cards. If May did survive a no confidence motion, then a second EU referendum would be likely.

    [USD, CHF]
    EUR-CHF has been re-established back above 1.1300 after come choppy price action in recent sessions. The prevailing recovery has tracked the rebound in EUR-USD. The cross has support at 1.1296-98.

    [USD, CAD]
    USD-CAD has settled to a consolidation above the two-week low seen yesterday at 1.3160. Yesterday's 5% oil price surge generated demand of the Canadian Dollar given the importance of oil prices to the terms of trade of the Canadian economy. An ongoing recalibration of Fed tightening expectations, where markets are now discounting a pause in the cycle following a hike this month, has also been weighing on the U.S. currency. These dynamics, should they remain in play, should keep USD-CAD on a downward track. The BoC meets on policy this Wednesday, where no change is widely anticipated. USD-CAD has resistance at 1.3215-17.

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