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By XE Market Analysis February 21, 2019 7:04 am
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    XE Market Analysis: North America - Feb 21, 2019

    The Dollar lifted on ascending hopes for a U.S.-China trade deal during the Asia session before coming off the boil during the London AM session. Sources cited by Reuters said Washington and Beijing have started to outline commitments in principle in what is described as the most significant progress yet. EUR-USD saw some chop but little net direction, trading to a 1.1363 high on some positive aspects in Eurozone PMI data in flash February reports, before ebbing back to a low at 1.1322, and then settling near net unchanged levels on the day near 1.1350. USD-JPY plied a narrow range in the upper 110.00s, holding below yesterday's four-session high at 110.94. Elsewhere, the Australian Dollar came under sharp pressure, losing over 1% against the U.S. buck in printing a six-day low at 0.7086. The antipodean currency had reversed abruptly after rallying in the wake of a much stronger than anticipated jobs report out of Australia, hit by news that China was banning Australian coal imports out of the port of Dalian and imposing a overall cap on overall Australian coal imports for 2019 at 12 mln tonnes. Coal is Australia's biggest export. Beijing's move comes amid worsening relations between the two nations, on issues such as cyber security and China's policies towards Pacific islands, while China has reportedly been planning to curtail coal imports more generally to lift domestic prices.

    [EUR, USD]
    EUR-USD has seen some chop but little net direction, trading to a 1.1363 high on some positive aspects in Eurozone PMI data in flash February reports, before ebbing back to a low at 1.1322, and then settling near net unchanged levels on the day near 1.1350. Remarks from ECB member Nowotny, that he "can't see need" for more liquidity, suggesting he isn't favouring a fresh blast of TLTRO lending, left the Euro unstirred. EUR-USD essentially remains in a consolidation after yesterday posting two-week high at 1.1371. The minutes from the late-January FOMC meeting noted the Fed's patient stance amid various risks, with "many" members unsure what direction rate policy would take. The affirmation of the Fed's policy pause, along with hopes that the U.S. and China are nearing a deal on trade, helped maintain a risk-on theme on Wall Street and in Asia markets. The Dollar seemed to benefit from this, or at least the apparent progress on the trade front, during the Asian session, but the currency has subsequently traded more neutrally in London. Overall, we retain a bearish view of EUR-USD. Concerns about U.S. tariffs on cars imported from the Eurozone along with signs of flagging Eurozone growth momentum, and the associated rekindling in ECB dovishness (Nowotny excepted), should keep the common currency on an overall weakening tack versus the Dollar, given the relative resilience of the U.S. economy. EUR-USD has trend resistance at 1.1383-85.

    [USD, JPY]
    USD-JPY has been plying a narrow range in the upper 110.00s, holding below yesterday's four-session high at 110.94. The minutes from the late-January FOMC meeting noted the Fed's patient stance amid various risks, with some members indicating the potential for a hike later this year if the economy performed well, as was expected, while others said it would take firmer than expected inflation to necessitate a hike (what Powell said in his presser). But in general, "many" were unsure what direction rate policy would take. There was also nothing concrete on the timing of the balance sheet runoff, other than perhaps later this year. The affirmation of the Fed's policy pause, along with hopes that the U.S. and China are nearing a deal on trade, helped maintain a risk-on theme on Wall Street and in Asia markets. The MSCI Asia-Pacific (ex-Japan) index rose 0.4% in making a fresh four-and-a-half-month high. Stronger than expected Australian jobs data were also in the mix, though Japanese data showed manufacturing activity posting its first contraction in February for the first time in two-and-a-half years due to weaker domestic and export orders. On the U.S.-China trade front, a source cited by Reuters said the two sides have started to outline commitments in principle in what is described as the most significant progress yet.

    [GBP, USD]
    Sterling has been trading neutrally so far today, after weakening moderately yesterday. The UK currency remains up by 2% on the dollar from week-ago levels, and by 1.6% and 2.2% against the euro and yen, respectively, over the same period. The gains reflect a partial unwinding in the pound's Brexit discount, although the situation remains thickly clouded in uncertainty. Through the mists, however, there is a cautious belief that a no-deal Brexit -- despite being deliberately hung out as a political persuasion tool -- will be avoided. Countless businesses on both sides of the channel, and in North America and Asia, have warned about the consequences of a no deal, and Fitch Ratings said the UK risked a prolonged recession and losing its AA rating in this scenario. A report published last week by an Irish Senator and UNESCO also concluded that there would be a return to violence in Northern Ireland in the event a hard border was re-imposed following a no-deal Brexit. Few politicians are wanting to be associated with a no deal. A UK cabinet source cited by the Guardian yesterday said that ministers have noticeably turned against using the no-deal threat as a negotiating tactic. We see the pound, still markedly undervalued, as having potential to rotate to a trading band at least 5% higher at such time that a no-deal Brexit could be concretely ruled out.

    [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 found a footing after sliding over the last two days, drawn lower as oil prices hit three-month highs. The pair has lifted to the 1.3200 area after posting a two-week low at 1.3150 yesterday. The pair has been trending lower since making a three-week last week at 1.3340. Wholesale trade and retail sales are the next Canadian data releases of note (due today 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 support at 1.3148-50.

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