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By XE Market Analysis January 4, 2019 6:59 am
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    XE Market Analysis: North America - Jan 04, 2019

    A reversal of risk-off positioning has seen the yen underperform, while currencies with higher beta characteristics, such as the Australian dollar and other dollar bloc units, and developing world currencies, have outperformed most other currencies. The Dollar itself has traded mixed, on net, and EUR-USD settled to an oscillation of the 114.00 level. USD-JPY lifted back above 108.0 on the back of Yen weakness. A show of remarks from a slew of Japanese policymakers aimed at assuaging market nerves after yesterday's thin-market flash crash in USD-JPY, along with expectations for a strong December jobs report out of the U.S. today, which juxtaposes expectations for neutral Fed policy before an ultimate rate cut at the 18-months horizon, have lifted market spirits. USD-CAD dropped for a second straight day, putting in some more distance from the 20-month peak that was seen at 1.3663. A 16-day low has been printed at 1.3431. Focus today will be on the duel releases of the U.S. and Canadian jobs reports for December. We expect the U.S. version to show a 205k headline rise (median 185k), with the unemployment rate to ticking down to a new cycle low of 3.6% from 3.7% in the prior three months. As for Canadian employment, we expect a rise of 20.0k after the 94.1k surge in November.

    [EUR, USD]
    EUR-USD settled to an oscillation of the 114.00 level after the whipsawing price action of earlier in the week, which left a near three-week low at 1.1309 and a two-month high just shy of 1.1500. 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 are increasing signs of flagging economic growth momentum. 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. Resistance comes in at 1.1439-40.

    [USD, JPY]
    USD-JPY has lifted amid Yen underperformance as risk-off positioning unwound some in Asia. A show of remarks from a slew of Japanese policymakers aimed at assuaging market nerves after yesterday's thin-market flash crash in USD-JPY, along with expectations for a strong December jobs report out of the U.S. today, which juxtaposes expectations for neutral Fed policy before an ultimate rate cut at the 18-months horizon, have lifted market spirits. There is also a degree of optimism about the U.S.-China trade talks slated for January 7-8 in Beijing, as increasing signs of real-world impact of the trade spat raises the incentives on both sides for compromise, and Beijing said China will step up "countercyclical adjustments" of macro policies. In the U.S., the House of Reps passed bills that will reopen Federal government agencies, less the funding for the wall that Trump is demanding, but the White House quickly rejected by way of the veto threat, leaving the partial government shutdown no closer to being resolved. S&P 500 futures have rebounded by nearly 1% after the cash version of the index closed yesterday 2.5% for the worse. Japan's Nikkei 225 still closed 2.6% down in catch up trade as Tokyo markets reopened after a protracted break. USD-JPY lifted to the low-to-mid 108.0s, putting in some more distance from yesterday's flash-crash low at 104.81, but still leaving the pair below 109.00-plus levels that were prevailing ahead of the crash.

    [GBP, USD]
    Sterling has been on an overall steady-to-softer footing versus most currencies. Cable printed a 21-month low at 1.2455 yesterday (according to our data), since recovering to the 1.2700 area in price action that has been largely driven by Dollar volatility. UK markets this week ignored the stronger than expected headline readings in both December UK manufacturing and services PMI headlines. The former showed that Brexit contingency-related activity had buoyed activity in the sector, with the underlying trend remaining demonstrably weak, while the details of the services report were mostly discouraging, despite the above-median outcome, which at 51.2 is still one of the slowest rates seen since the vote to leave the EU in June 2016. New work increased only slightly in the large services sector, while job creation was at its weakest since July 2016 and confidence for the year ahead fell to its second-weakest reading since March 2009, the blame for which was pinned firmly on Brexit uncertainty. Brexit uncertainty continues to endure. The EU rejected the latest efforts by UK Prime Minister May to win concessions on the Irish board backstop, and it continues to look likely that her deal will be voted down at the upcoming parliamentary vote. The UK economy is likely to remain in a funk, at risk of seeing growth turn negative this quarter depending how the European and global economies hold up, and depending how Brexit unfolds. This should leave the Pound on downward bias.

    [USD, CHF]
    EUR-CHF has recouped to around the 1.1250 level after yesterday punching out a four-month low at 1.1184, which was seen as the Swiss franc picked up safe haven demand in the wake of Apple's revenue warning (which in turn followed December manufacturing PMI data showing weakening across key global economies). 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 for a second straight day, putting in some more distance from the 20-month peak that was seen at 1.3663. A rise in oil prices amid a revival in risk appetite in global markets has helped the Canadian Dollar, U.S. Fed funds futures have now priced out Fed tightening expectations for 2019 and are factoring in a 25 bp rate cut at the 18-month horizon. USD-CAD has descended into two-week low territory under 1.3450. The early December low at 1.3160 provides a downside waypoint. Focus today will be on the duel releases of the U.S. and Canadian jobs reports for December. We expect the U.S. version to show a 205k headline rise (median 185k), with the unemployment rate to ticking down to a new cycle low of 3.6% from 3.7% in the prior three months. As for Canadian employment, we expect a rise of 20.0k after the broadbased 94.1k surge in November. The unemployment rate is seen edging up to 5.7% from the record low 5.6% in November. Canada also releases the November industrial product price index is projected to fall 0.5% (m/m, nsa) after the 0.2% rise in October, as weaker energy prices weigh. The raw materials price index is expected to tumble 5.0% in November following the 2.4% pull-back in October as lower oil prices weigh. On balance, the data should be supportive of USD-CAD.

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