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By XE Market Analysis February 18, 2019 7:00 am
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    XE Market Analysis: North America - Feb 18, 2019

    A Dollar softening theme emerged during the London AM session, which saw EUR-USD and Cable post respective two-session highs at 1.1330 and 1.2938, and USD-JPY ebbed back come after printing a high at 110.61. Stock markets were near net unchanged in Europe, and S&P 500 futures were showing fractional losses, following a bullish session in Asia, which was pinned on hopes that the U.S. and China, which last week agreed to extend talks into this week, are ripe for making a deal on trade, or at least make sufficient progress for the U.S. to delay tariff hikes. Market participants are also looking to fresh dovish turns from the ECB and the Fed, the latter of which will see the minutes to the late-January FOMC meeting published this Wednesday, which, together with a busy slate of Fed speakers this week, will shed further light on what the Fed is thinking on policy, including the pace of balance sheet shrinkage. ECB's Olli Rehn and his colleague Villeroy spoke of the slowing in the Eurozone economy. The OECD also warned about the risks to the Portuguese economy despite "marked improvements," while official projections showed that Eurosceptic parties will command more than a fifth of the seats in the European Parliament following May elections. News that seven pro-EU MPs resigned from the Labour party was also in the mix today, although it doesn't look like this in an of itself will have much impact on Brexit proceedings.

    [EUR, USD]
    EUR-USD has settled higher, printing a three-day high at 1.1324. This extended the rebound from the three-month low seen on Friday at 1.1234. The low had been seen amid speculation that the ECB is heading for another blast of Targeted Long-Term Refinancing Operations (TLTRO) to buoy bank lending. ECB's Olli Rehn said in a German press interview published over the weekend that recent data showed a weakening in the Eurozone economy, while his colleague Villeroy spoke today of a "significant" slowdown afoot. The comments confirm that the ECB could change its guidance on rates if the slowdown proves persistent, which, as Villeroy pointed out, also depends on whether politicians can resolve the current uncertainty. TLTROs clearly also remain an option if things got worse, but so far the message on that front has been that the ECB needs a solid monetary policy reason to consider that, and so far it seems markets seem more keen on the idea than the ECB. The Fed, meanwhile, is also amid a dovish phase. Markets are expecting this Wednesday's release of the Fed's minutes from the late-January FOMC meeting to show policymakers in a cautious mood, and also show a deceleration in the pace of post-QE balance sheet shrinkage. Overall, we expect the EUR-USD to proceed with a flat-to-lower directional bias. Resistance comes in at 1.1335-40.

    [USD, JPY]
    USD-JPY posted a four-day low at 110.25. EUR-JPY, AUD-JPY and other Yen crosses saw similar declines, with the Japanese currency finding a degree of safe-haven support as global stock markets tipped lower. Japan's Nikkei closed 1.2% for the worse, while the MSCI Asia-Pacific index (ex-Japan) shed over 1%. Yesterday's notable miss in U.S. retail sales has been one bearish force (a post-data survey of economists by Reuters found respondents ascribing a one-in-four chance for the U.S. to enter recession over the coming year). President Trump's decision to call a national emergency to try to obtain funds for his border wall was also pegged as being a negative in market commentaries. Data out of China, showed PPI inflation slowing for a seventh straight month in January to its weakest since September 2016, which highlighted cooling domestic demand in the world's second biggest economy. Also in the mix has been a near 1.5% rally in oil prices, which are at 10-year highs, after Saudi Arabia announced a cut in crude exports. Focus is now on the U.S.-China trade front. The week round of talks in Beijing ended without a deal being struck, but discussions will continue in Washington next week at a senior level. USD-JPY has resistance at 110.70-72, and support at 109.80-83.

    [GBP, USD]
    Sterling has settled higher after taking a sharp tumble on news of UK Prime Minister May's humiliating defeat in parliament yesterday in a motion that was meant to endorse the government's negotiating strategy. Cable printed a one-month low at 1.2773 before recouping and then settling near 1.2800. The pair remains about 1% down on week-ago levels. The vote in the House of Commons yesterday does not have legal significance, and a spokesperson for the prime minister confirmed that the government will continue in its efforts to win concessions on the Irish backstop part of the withdrawal agreement before returning to parliament by no later than February 27. UK January retail sales today beat expectations in rising 1.0% m/m in the headline figure, rebounding after contracting by 0.7% in December (revised up from -0.9%). In the three months to January comparison, sales rose 0.7% versus the three months to December, showing that the underlying trend remains healthy, despite the outsized monthly decline in December (which was a hangover from a robust November, largely reflecting the impact of Black Friday sales, which is a growing phenomenon in the UK). The data suggests that the consumer sector remains, so far, Brexit resilient. This may not last, however, as economic headwinds and the consequences of persisting Brexit uncertainty, which is impacting business investment, are bearing down. The long-awaited clarity on Brexit doesn't look likely to happen for a while yet. The should maintain the 13-15% discount the pound has been trading at in trade-weighted terms since the vote to leave the EU in June 2016. Cable has support at 1.2725-27.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.1300s after a third-day decline, which on Friday left a six-day low at 1.1332. This extended the decline from the five-day high that was seen Tuesday at 1.1406. The price action has continued a phase of relatively high volatility that the cross 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, 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 ebbed back to the lower 1.3200s, down from the three-week seen last week at 1.3340. A rally in oil prices, which has lifted the WTI benchmark to three-month highs above $56.50, has underpinned the Canadian Dollar. There are also market expectations for the release of the Fed's minutes to show the central bank to be lessening the rate of post-QE balance sheet shrinkage. USD-CAD has resistance at 1.3266-70, and support at 1.3196-98.

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