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By XE Market Analysis December 21, 2017 7:38 am
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    XE Market Analysis: North America - Dec 21, 2017

    The dollar majors have posted narrow ranges, though USD-JPY still managed to eke out a nine-day high of 113.63, which caps a third straight day of gains. The BoJ left policy unchanged at its final policy meeting of the year, noting that the economy will continue its "moderate expansion," but signalling that it was in no rush to remove crisis-mode stimulus. BoJ Governor Kuroda also said that the central bank will remain committed to dovish policy settings even if the government declares that the threat of deflation has ended. The dollar is showing a mixed performance on the week so far, down 0.8% versus the euro, near net unchanged against the Australian dollar, while showing a 1% gain on the yen, and moderate gains versus sterling and the Canadian dollar. The passage of the U.S. tax overhaul this week was largely anticipated, and while heralding an era of looser fiscal policy, markets have been noncommittal in thin year end conditions, while concerns remain about the temporary funding bill needed by tomorrow to avoid a government shut down.

    [EUR, USD]
    EUR-USD has settled in the mid-to-upper 1.18s after touching a three-week high of 1.1901 yesterday. We anticipate overall directional bias to shift downwardly in early 2018, assuming the temporary financing bill is passed and a government shutdown is avoided, following the success of the $1.5 tln tax bill. Passage of the tax overhaul, which will be largely deficit financed and will slash the corporate tax rate, among other things, has been widely anticipated, and is generally seen as a positive for the dollar, heralding a loosening in fiscal policy with the implication of tighter-than-previously-envisaged monetary policy. EUR-USD has support at 1.1809-10, and resistance at 1.1900-01.

    [USD, JPY]
    The yen has traded softer after the BoJ left monetary policy unchanged and, more particularly, signalled that it is in no rush to exit from crisis-mode stimulus policies despite maintaining an upbeat view on the economy. Governor Kuroda followed up in his press conference by saying that central bank will remain committed to dovish policy settings even if the government declares that the threat of deflation has ended. USD-JPY lifted for a third successive day, logging a nine-day high at 113.63. EUR-JPY has rallied in to 26-month high territory, breaching stop buy orders and triggering option barriers following the break above 113.50 yesterday. AUD-JPY is at seven-week highs. Technically, USD-JPY is amid a broadly sideways chop, roughly centred between 108.0 to 115.00, which has been persisting for eight months now. More of the same looks likely into 2018, though there is clearly an upward trending phase is afoot now, and, as we expect the dollar to rally in early 2018 as markets digest looser fiscal policy in the U.S, risks are for sustained gains.

    [GBP, USD]
    Sterling has lost an average 0.5% to the dollar, euro and yen this week. On the year-to-date, the pound has lost nearly 4% to the euro, which outperformed this year as existential political threats came and went and as Eurozone growth momentum picked up notably, while gaining nearly 9% against the dollar, which partly reflect the pound's recovery from the worst of the losses (ex euro) seen after the vote to leave the EU in June 2016. One takeaway from 2017 is that UK growth has underperformed both the U.S. and Eurozone. We estimate 2017 growth of 1.6% in the UK versus a growth rate of 2.5% in the U.S and 2.2% in the Eurozone. The UK's high inflation rate (Nov CPI was 3.1%), has weighed on private domestic demand, offsetting the benefits of the weaker pound, which has sustained about a 15% depreciation since the Brexit vote. Talks with the EU on a new post-Brexit trade deal will commence in March, but we expect the pound to remain mired in its historically weak range as the highly convoluted political situation in Britain looks set to continue to inspire uncertainty among investors and business leaders.

    [USD, CHF]
    EUR-CHF is up for a third successive day, logging a three-week peak at 1.1736, which by our data is 1 pip shy of the peak seen on December 1, which in turn was the loftiest level seen in 35 months. The cross has gained 9.3% on the year-to-day, which is slightly behind the gain the euro has seen versus the yen and short of the 12.9% gain that EUR-USD has seen, but is significant as is shows the biggest weakening the franc has seen versus the euro, and in trade-weighted terms, since the Eurozone crisis took hold back in 2010. The Eurozone's has seen political threats diminish this year, which along with a steady and assured pickup in growth momentum, have, along with -0.75% deposit rate, seen the franc unwind any vestiges it had of being a safe haven currency. Assuming the Eurozone has indeed conquered existential political threats, and assuming the SNB remains anchored to ultra-accommodative monetary policy, which looks likely to be the case for the foreseeable (the central bank reaffirmed this commitment at its quarterly policy review this month), we anticipate EUR-CHF will make an eventual return to 1.2000, which was the former floor the central bank maintained until January 2015.

    [USD, CAD]
    USD-CAD has settled back in the mid 1.28s after a short-lived spike above 1.2900 level earlier in the week. The pair has failed to hold gains above 1.2900 on multiple occasions since early October. How the U.S. dollar benefits from the expected tax overhaul, how oil prices evolve, how NAFTA re-negotiations go, and how the BoC proceeds with its slow-go tightening cycle will be dominant themes for USD-CAD heading into 2018. Over the holiday period we anticipate USD-CAD to hold in a rough 1.2700 to 1.2900 consolidation range.

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