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By XE Market Analysis February 12, 2019 7:22 am
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    XE Market Analysis: North America - Feb 12, 2019

    The Dollar posted fresh highs, while the Yen underperformed against a backstop of rallying global stock markets. EUR-USD printed a three-month low at 1.1257 before rebounding smartly back to the 1.1280 area amid a spike in EUR-CHF and broader underperformance in the Swiss franc amid suggestions of SNB intervention. Some market narratives have been highlighting that while the Fed made a hawkish-to-neutral shift in policy stance in January, the central bank has maintained gradual tightening by continuation of balance sheet shrinkage. U.S. yields also remain significantly above those of German and Japanese yields, among others. USD-JPY rose to a near seven-week high of 110.65. EUR-JPY has also gained, while AUD-JPY has outperformed with a rise of 0.5% in making a six-day high at 78.35. The Yen's underperformance has been concomitant with a risk-on sentiment in global markets. Japan's Nikkei 225 closed 2.6% for the better amid a combo of catch-up gains, with Japanese markets reopening after yesterday's public holiday, and outperformance of exporter stocks as a consequence of the softer Yen. The MSCI Asia-Pacific (ex-Japan) index rose by 0.3%, while S&P 500 futures have gained 0.7% in overnight trading. European markets also rallied, with the Stoxx 500 up just over 1% as of the early PM session. News that U.S. lawmakers have reached an "agreement in principle" on border security was tonic, while on the U.S.-China trade talks front, officials from both sides have be setting market-soothing mood music with upbeat remarks.

    [EUR, USD]
    EUR-USD sprang out of a three-month low at 1.1257, concurrently with a turn higher in EUR-CHF and broader underperformance in the Swiss franc amid suggestions of SNB intervention. EUR-USD recouped to levels around 1.1280. Overall, we continue to take a bearish view of the pairing. The evident slowing in the Eurozone economy, along with Brexit uncertainty, have served to both weigh on the common currency and to indirectly emphasise the relative benefits of the U.S. currency. Some market narratives have been highlighting that while the Fed made a hawkish-to-neutral shift in policy stance in January, the central bank has maintained gradual tightening by continuation of balance sheet shrinkage (which it's doing by refraining from reinvesting in replacement securities when bonds bought under the QE program mature). U.S. yields also remain significantly above those of German and Japanese yields, among others. One caveat is the U.S. data picture remains incomplete and distorted as a consequence of the recent partial government shutdown, and we expect signs of flagging momentum to surface. On the trade front, there are expectations for some degree of compromise by the U.S. and China. EUR-USD resistance comes in at 1.1300-10, and support at 1.1257-60.

    [USD, JPY]
    USD-JPY rose to a near seven-week high of 110.65. EUR-JPY has also gained, while AUD-JPY has outperformed with a rise of 0.5% in making a six-day high at 78.35. The Yen's underperformance has been concomitant with a cautious-but-distinct risk-on sentiment in global markets.In stock markets, the Nikkei 225 closed 2.6% for the better amid a combo of catch-up gains, with Japanese markets reopening after yesterday's public holiday, and outperformance of exporter stocks as a consequence of the softer Yen. The MSCI Asia-Pacific (ex-Japan) index rose by 0.3%, while S&P 500 futures have gained 0.7% in overnight trading. European markets also rallied, with the Stoxx 500 up just over 1% as of the early PM session. News that U.S. lawmakers have reached an "agreement in principle" on border security that would avert another government shutdown at the end of the week, has been tonic, while on the U.S.-China trade talks front, officials from both sides have be setting market-soothing mood music with upbeat remarks. While few expect the issue of intellectual property is unlikely to be resolved to the full satisfaction of the Trump administration, there is a narrative in markets that we're at the point, given abundant signs of slowing in global growth, and with President Trump already going into campaigning mode into the 2020 elections, where there is scope for compromise which would most likely see a further suspension of the tariff hike the U.S. has threatened to implement on March. This would maintain the exiting 10% duties but avoid the hike to a 25% tariff on $200 bln of Chinese goods the U.S. imports.

    [GBP, USD]
    Cable declined for a second consecutive day, edging out a fresh three-week low at 1.2832. A firmer Dollar has been at play, while yesterday's slew of sub-forecast UK data yesterday, including Q4 and December releases for GDP, trade and production, have added evidence of Brexit-caused economic slowing. Regarding Brexit, like the BoE, we see a no-deal scenario as a low-risk probability, but there still remains a lack of clarity about how and when the process will be resolved. One way forward that looks likely would have sufficient parliamentary support is for the government and Labour opposition to reach accord comprise, which would entail remaining in the customs union, but Prime Minister May has so far been reluctant to go this route as it would severely split her party. The pound is continuing to trade at about a 13%-14% discount in trade-weighted terms relative to levels prevailing ahead of the vote to leave the EU in June 2016. Cable support at 1.2800-02, and resistance at 1.2900-05.

    [USD, CHF]
    The Swiss franc has come under notable pressure, falling against all of the main currencies. The currency is presently off by 0.4% against the dollar and euro, and by 0.7% against the Australian dollar, which is the day's outperformer. This has pushed USD-CHF back to near three-month high terrain, while EUR-CHF has reversed over a third of declines seen last week, which was seen after the cross had in the early part of last week spiked to a three-month high at 1.1443. EUR-CHF's high today is 1.1368. The price action continues a phase of relatively high volatility EUR-CHF has been experiencing. Since early January there have been several bouts of pronounced underperformance in the Swiss franc, often accompanied by talk/suspicions of SNB intervention. SNB vice president, Zurbruegg, also said last month that the franc "remains highly valued" and the situation on foreign currency markets is "still fragile" and that the SNB's two pillar strategy of negative interest rates and ad-hoc currency interventions, or threat thereof, "remains appropriate." SNB Chairman Jordan said recently that for 2019 the biggest concerns are "political mistakes," pointing to the U.S.-China trade war and "Brexit and the European situation." Jordan also expressed concern about further safe-haven driven franc appreciation, "especially" in a no-deal Brexit scenario.

    [USD, CAD]
    USD-CAD has continued to ply a relatively narrow, consolidative range in the upper 1.3200s after recovering out o the 1.3232 low that was seen in the wake of Canada's January employment report on Friday. That interrupted a run of five consecutive higher highs in USD-CAD, which was seen as oil prices tumbled by over 5%. The Canadian Dollar still remains up by over 2.5% against the U.S. buck on the year-to-date. This has been concomitant with the 15%-plus gain seen in oil prices over the same period. Sustained gains in crude prices are a boon to Canada's terms of trade, and vice versa. USD-CAD has support at 1.3230, and resistance at 1.3319-20.

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