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By XE Market Analysis December 28, 2018 6:49 am
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    XE Market Analysis: North America - Dec 28, 2018

    Dollar weakness alongside Yen and Swiss Franc outperformance have remained the dominant theme in thin year-end forex markets, with the safe haven currencies ascending despite concurrent gains in most global stock and commodity markets. USD-JPY lost over 0.5% in posting a low of 110.23, returning focus on the four-month low seen earlier this week at 110.14. USD-CHF also shed over 0.5% on route to a three-month low at 0.9806. The Dollar also lost ground, although to a lesser degree, to the Pound and Dollar bloc currencies. EUR-USD printed a one-week high at 1.1472, nearing last week's seven-week high at 1.1485. Political uncertainty in the U.S. has become a worry for investors, offsetting the Fed's refrain from indicating a pause in the rate hike cycle at its policy meeting this month. Many investors will be waiting for the return of more normal market conditions in the new year after this week's bouts of low-volume turbulence. A flurry of month-end data releases out of Japan were a mixed bag, with core November Tokyo CPI edging lower to 0.9% y/y from 1.0% in September, industrial production contracting 1.1% m/m, better than the median forecast for a 1.5% y/y fall, while November retail sales fell by 1.0% m/m, worse than the median forecast for a 0.4.% m/m contraction. The BoJ published its summary of opinions from its policy meeting earlier in the month, which noted that risks to growth have been rising. In China, Beijing's pledged "proactive" fiscal policy in 2019. In Europe, German and Spanish inflation data came in more benign than expected, while the Swiss KOF leading indicator undershot expectations by a wide margin.

    [EUR, USD]
    EUR-USD has ebbed back from the one-week high seen during the Asia session at 1.1468. The pair has settled under 1.1450, leaving last week's seven-week high at 1.1485 unchallenged. Political uncertainty in the U.S. has become a worry for investors, offsetting the Fed's refrain from indicating a pause in the rate hike cycle at its policy meeting this month. The Euro has also been experiencing conflicting forces, with signs of flagging economic growth momentum on the one hand, and a rally in Italian assets on the back of Brussels-appeasing budget proposals out of Rome, on the other. In the bigger view, we see EUR-USD as having entered a broadly sideways range phase as markets continue to fathom the push of the populist political movement in Europe and the pull of a lower Fed tightening trajectory. Support comes in at 1.1356-58, and resistance at 1.1468-70.

    [USD, JPY]
    USD-JPY fell to a low of 110.32, returning focus on the four-month low seen earlier this week at 110.14. Wall Street closed higher after a late PM rally yesterday, and most Asian equity markets have also gained, aided by Beijing's pledge today for "proactive" fiscal policy in 2019. Many investors will be waiting for the return of more normal market conditions in the new year after this week's bouts of low-volume turbulence. A flurry of month-end data releases out of Japan were a mixed bag, with core November Tokyo CPI edging lower to 0.9% y/y from 1.0% in September, industrial production contracting 1.1% m/m, better than the median forecast for a 1.5% y/y fall, while November retail sales fell by 1.0% m/m, worse than the median forecast for a 0.4.% m/m contraction. The BoJ published its summary of opinions from its policy meeting earlier in the month, which noted that risks to growth have been rising. The 10-year JGB yield also traded negative for the first time since September. We take a bearish view of USD-JPY on the view that global stock markets will entered a bear phase, correcting after a near decade winning streak as the era of ultra-accommodative monetary policy unravels. The U.S. versus China standoff also looks to sustain, especially with other nations charging Beijing with corporate espionage.

    [GBP, USD]
    The Pound is entrenched in a sideways range versus most currencies. Cable is settled in the mid 1.2600s, continuing a broadly sideways range that has been unfolding over the holiday period, which follows a sustained period of Brexit-related declines, which left a 20-month low versus the dollar at 1.2476 on December 12. The London interbank market has reopened today, but will be operating at skeletal staffing levels through to the new year. In the new year, the UK Prime Minister will likely continue to plug away in her diplomatic effort to sweeten the Brexit deal, although it's clear that there won't be any renegotiation by the EU. This suggests that the Withdrawal Agreement from the EU is headed for eventual failure in the UK Parliament. The parliamentary vote on the Brexit deal and outline for a future relationship will take place in the week of January 14, before the legislated deadline of January 21. Our best guess remains that Parliament will vote down the deal and, of all the possible scenarios at that point, that a new EU referendum will be the path of least resistance. We anticipate that the Pound with remain a sell-into-gains trade into the vote, but also see potential for the currency to rally between 5% and 10% as we expect disorderly no-deal Brexit scenario to be avoided.

    [USD, CHF]
    EUR-CHF has continued to gravitate around the 1.1300 level after a volatile week. The cross has remained comfortably above the two-and-a-half month low seen earlier in the month at 1.1225. The SNB remained firmly on hold at its quarterly policy meeting this month, continuing to rely on the combination of negative interest rates and the threat of intervention to limit appreciation in the currency in times of heightened uncertainty about the global outlook.

    [USD, CAD]
    USD-CAD printed a new 19-month high at 1.3661 yesterday. While the Fed has shifted to a lower tightening trajectory, oil prices and other industrial commodity prices tumbled to fresh trend lows on global growth concerns. This backstop, which looks likely to sustain well into 2019, should keep USD-CAD biased towards the upside. Support comes in at 1.3565-68. The 2017 high at 1.3793 provides an upside waypoint.

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