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By XE Market Analysis January 2, 2019 6:56 am
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    XE Market Analysis: North America - Jan 02, 2019

    The Dollar has traded mostly firmer, although lost ground to a safe-haven buoyed Yen, while Sterling and the Australian Dollar were the underperformers out of the main currencies, the former on Brexit concerns and the latter on China and global growth concerns. EUR-USD tracked back to the lower 1.1400s lower after punching out a two-month high within a whisker of 1.1500. The final release of the Eurozone December manufacturing PMI was unrevised at 51.4, but the detail of the report shone a light on a third consecutive month of decline new orders, with confidence for the year ahead hitting a six-year low. This weighed on EUR-USD, with the Dollar itself found a degree of safe haven demand. USD-JPY and Yen crosses dropped sharply as the risk-off sentiment took a grip on global markets. S&P 500 futures were showing a loss of over 1.5% at the overnight lows, while European and Asian stock markets have posted across-the-board declines after December manufacturing PMI reports have in both Asia and Europe have fed the narrative of slowing global growth. Oil and other industrial commodity prices came under pressure. Sterling has hit fresh lows against most currencies, with markets ignoring the stronger than expected headline reading in the December UK manufacturing PMI, which in fact showed that Brexit contingency-related activity had buoyed activity in the sector, with the underlying trend remaining demonstrably weak. Cable hit a low of 1.2671, over a big figure down on the closing 2018 level. Elsewhere, AUD-USD hit a 35-month low at 0.7001.

    [EUR, USD]
    EUR-USD tracked lower after punching out a two-month high within a whisker of 1.1500. The final release of the Eurozone December manufacturing PMI was unrevised at 51.4, but the detail of the report shone a light on a third consecutive month of decline new orders, with confidence for the year ahead hitting a six-year low. This weighed on EUR-USD, with the Dollar itself finding a degree of safe haven demand as stock markets across Asia and Europe took an early-year tumble. Heading into 2019, we are taking a more neutral view of the Dollar after being bullish for much of 2018. U.S. monetary policy has ceased to be a support, with Fed fund futures having now largely priced out any hike for 2019, and now imply a 25 bp cut by mid-2020. On the Euro side of the coin, there have been some conflicting forces, with signs of flagging economic growth momentum on the one hand, and a rally in Italian assets on the back of a Brussels-appeasing budget, on the other. 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 more neutral Fed policy stance. Support comes in at 1.1400 and resistance at 1.1500.

    [USD, JPY]
    USD-JPY and Yen crosses have continued to drop sharply as a strong risk-off sentiment grips early-year global markets. S&P 500 futures are down 1.5%, although off lows, while European and Asian stock markets have posted across-the-board declines. This has fed safe haven demand for the Japanese currency. December manufacturing PMI reports have in both Asia and Europe have fed the narrative of slowing global growth. The final release of the Eurozone December manufacturing PMI was unrevised at 51.4, but the detail of the report shone a light on a third consecutive month of decline new orders, with confidence for the year ahead hitting a six-year low. The UK's manufacturing PMI report was perky in the headline, but this was due to Brexit related contingency activity, while sub-forecast manufacturing PMI readings were seen in Asian economies, led by China. We have been advocating a bearish view of USD-JPY on the view that global stock market volatility will remain peaky well into 2019, seeing scope for deeper corrections after a near decade winning streak, with valuations needing to adjust to a world with less accommodative liquidity and slowing economic growth. U.S. monetary policy has also ceased to be a support for the dollar, with Fed fund futures now having largely priced out any hike for 2019 while implying a 25 bp cut by mid-2020.

    [GBP, USD]
    Sterling has hit fresh lows against the Dollar, Yen, Euro and other currencies, with markets ignoring the stronger than expected headline reading in the December UK manufacturing PMI, the report of which showed that Brexit contingency-related activity had buoyed activity in the sector, with the underlying trend remaining demonstrably weak. Cable has hit a low of 1.2671, over a big figure down on the closing 2018 level. The biggest mover has been GBP-JPY, which lost over 1.1% in printing a 21-month low at 138.09. Regarding Brexit, it's clear that there won't be any renegotiation by the EU and that, in all likelihood, the 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 1.1250-1.1300. The cross has remained comfortably above the two-and-a-half month low seen in December at 1.1225. The SNB remained firmly on hold at its quarterly policy meeting last 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 has dropped back under 1.3500 amid a broader bout of U.S. Dollar weakness. Markets look to be continuing to price the Fed's policy outlook shift to more neutral footing, which has offset the impact of weakness in oil prices on the Canadian currency. USD-CAD has support at 1.3565-68. The 2017 high at 1.3793 provides an upside waypoint.

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