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By XE Market Analysis February 19, 2019 7:02 am
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    XE Market Analysis: North America - Feb 19, 2019

    The dollar majors have continued to trade relatively steadily. USD-JPY edged out a high at 110.81, which is the loftiest level seen since Friday, while EUR-USD has been narrowly orbiting 1.1300, consolidating after rebounding from Friday's three-month at 1.1234. The euro has turned lower in the latest phase, which follows a batch of dovish-leaving ECB speakers which have maintained market speculation that the ECB is heading for another blast of Targeted Long-Term Refinancing Operations (TLTRO). European stock markets turned negative after a flat session in Asia. Market participants are waiting for clarity on the U.S.-China trade situation, though hopes are generally high that the two sides are ripe for compromise at this week's round of discussions, which will commence today in Washington DC. The optimism is reflected by the 6.6% rise China's Shanghai Composite equity index since the start of February. Markets are also anticipating Wednesday's release of the Fed's minutes from the late-January FOMC meeting given the central bank's dovish turn then, looking in particular for clarity on the pace of post-QE balance sheet shrinking. BoJ Governor Kuroda did his version of a dovish turn today, saying that if the Yen were to strengthen, "we'll consider easing policy." This sparked a dip in both the Yen and JGB yields, though the impact was limited as this is pretty much consistent with ongoing policy, and was less noteworthy compared to the dovish turns being seen at other central banks, particularly the Fed. Sterling has been seeing little directional impulse versus the dollar, euro and other currencies, with the UK still clouded by Brexit uncertainty.

    [EUR, USD]
    EUR-USD has settled to a narrow orbit of 1.1300, consolidating after rebounding from the three-month low seen on Friday at 1.1234. The low had been seen set amid speculation that the ECB is heading for another blast of Targeted Long-Term Refinancing Operations (TLTRO) to buoy bank lending. The ECB's chief economist, Praet, outlined earlier measures that the central bank could take should the outlook worsen. This followed weekend remarks by ECB's Olli Rehn that recent data showed a weakening in the Eurozone economy, while his colleague Villeroy spoke yesterday of a "significant" slowdown afoot. The comments affirm 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 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 at the moment markets seem more eager on the idea than the central bank. 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 signal 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 edged out a fresh high, at 110.81, which is the loftiest level seen since Friday. The MSCI Asia-Pacific (ex-Japan) stock index posted fractional losses today, although remained near the four-month highs seen last Wednesday. Market participants are waiting for clarity on the U.S.-China trade situation, with hopes generally high that the two sides will reach a compromise at this week's round of discussions, which will commence today in Washington DC. The optimism is reflected by the 6.6% rise China's Shanghai Composite equity index since the start of February. Any good news on this front would have the potential to a risk-on theme in global markets, which would likely spark a rally in USD-JPY. BoJ Governor Kuroda, meanwhile, did some eyebrow lifting today by doing his version of a dovish turn, saying that if the Yen were to strengthen and was "having an impact on the economy and prices," and if it was considered necessary to achieve our price target, "we’ll consider easing policy." This sparked a dip in both the Yen and JGB yields, though the impact has been limited as this is pretty much consistent with ongoing policy, and was less noteworthy compared to the dovish turns at the ECB and, more especially, the Fed. USD-JPY has support at 109.90-94, and resistance at 111.05-07.

    [GBP, USD]
    Sterling has been seeing little directional impulse versus the dollar, euro and other currencies. Cable has settled near 1.2900, having lifted out of last week's 1.2773 low by bouts of dollar weakness. UK labour data today showed a 43-year low unemployment rate, a joint record high employment rate, and perky average household income growth. But the numbers are a snapshot of the three months to December, and look especially rear view as the path ahead is blanketed by the fog of Brexit uncertainty, the impact of which has showed up clearly in more recent and more forward looking survey data (such as the January PMI reports). On the Brexit front, news that seven Labour party members quit to form a group of independents raised eyebrows, although long since rumoured, and the development highlights the Brexit-caused fractures that have been afflicting both of the principal parties in the UK. The EU has continued to show precisely zero sign of bending to UK Prime Minister May's call for a concession on the Irish backstop, suggesting that the only way forward would be a cross-party compromise. May has so far avoided this route for fear of causing an irrevocable split in her Tory party. The next key date is February 27, when parliament will vote on the government's plan, or alternatives. The continued lack of clarity, and the continued threat of a no-deal Brexit scenario, 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.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.1300s after correcting from a six-day high that was seen last 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 set anchor in the mid 1.3200s, consolidating at lower levels after correcting 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 $56.70, 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. U.S. and Canadian markets will reopen today after their long weekend breaks. Wholesale trade and retail sales are the next Canadian data releases of note (due Thursday and Friday, respectively). We expect the former to fall 0.5% in December after a 1.0% drop in November, while we anticipate retail sales dipping 0.1% in December after the 0.9% decline in November. As-expected data would track our projection for a 0.1% decline in December GDP after a 0.1% loss in November, consistent with the BoC's view that the oil price plunge will temporarily slow GDP in Q4 and Q1. USD-CAD has resistance at 1.3266-70, and support at 1.3196-98.

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