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By XE Market Analysis January 31, 2019 7:06 am
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    XE Market Analysis: North America - Jan 31, 2019

    The Dollar steadied during the London interbank AM session after dropping sharply in the wake of the Fed's shift-to-neutral policy signal yesterday. The U.S. currency saw fresh lows against most currencies, though the pace of declines moderated compared to the losses seen in the initial wake of the Fed's communication yesterday. EUR-USD printed a fresh three-week high at 1.1514 in the early London session before retreating to the upper 1.1400s. USD-JPY eked out a new two-week low at 108.52 the later London AM, with the Yen picking up a degree of safe haven buying as bullish stock market momentum started to flag on European bourses. Eurozone data cast little impact, and focus is now falling on the U.S.-China trade talks and Brexit, the latter of which is now in a phase of fast evolution. These overhanging issues have reined-in follow through in global markets. Cable, after posting a fresh post-Fed high at 1.3156, settled in the lower 1.3100s, while the Pound ebbed to respective one-week lows against the Euro and Yen, with Brexit uncertainty having taken the shine out of Sterling. USD-CAD managed to hold above the 12-week high seen yesterday at 1.3118. Oil prices settled lower after hitting two-month highs yesterday, which took some of the wind out of the Canadian Dollar's sails.

    [EUR, USD]
    EUR-USD has consolidated lower after rallying by nearly 1% in the wake of the Fed's dollar-weakening shift-to-neutral guidance yesterday. An intraday low has been printed at 1.1471, putting in a little distance from the post-Fed three-week high at 1.1508. The pair remains well up on the 1.1418-20 levels that were prevailing ahead of the Fed's announcement. Eurozone data cast little impact, and focus is now falling on the U.S.-China trade talks and Brexit, the latter of which is now in a phase of fast evolution. These overhanging issues have reined in follow through in global markets as developments are awaited. EUR-USD is trading to the north of the midway point of a broadly sideways range that's been unfolding for over two months now. The low over this period is 1.1215 and the high is 1.1570. The slowing in the Eurozone economy should put a limit on the pair's upside potential, and we expect and overall sideways pattern to continue to unfold. Support comes in at 1.1460-62, and resistance at 1.1550.

    [USD, JPY]
    USD-JPY fell to a two-week low at 108.54, driven by Dollar selling after the Fed hit the pause button on its tightening cycle. There remains a degree of wariness in market sentiment, with participants waiting to see whether there will be a breakthrough in the current round of trade talks between the U.S. and China. Brexit concerns have also ratcheted up. A Reuters poll of hundreds of economists from around the world last week found a consensus view that a global slowdown is under way, and would sharpen if there was an escalation in the U.S.-China trade war. Reuters also highlighted that the Baltic Dry Index, a proxy of global economic health, has nearly 50% since mid 2018. We see risk for fresh USD-JPY declines should global stock markets turn lower again. The pair has resistance at 109.18-20.

    [GBP, USD]
    Cable has been re-established back above 1.3100 following the Fed's shift to a neutral policy footing, which prompted a rotation lower in the dollar. Brexit remains front and centre, in a phase of fasting-moving evolution. To recap, UK Prime Minister May is hoping that the threat of a disorderly no-deal exit from the EU on March 29 will persuade the EU to concede to dropping or time-limiting the Irish backstop. But, EU officials have so far remained implacable, saying that they will not reopen negotiations. While Parliament voted for an amendment that declares its opposition to a no-deal Brexit, it is nonbinding, although it has been the catalyst for the leader of the Labour opposition, Jeremy Corbyn, to now talk with the prime minister, having hitherto refused to do so. This, at the least, suggests there is some hope for a cross-party consensus being formed on an alternative withdrawal plan, though don't hold your breath. We continue think a no-deal Brexit will be avoided. May -- who voted for the UK to remain in the EU at the referendum in 2016 -- and her allies have been utilizing the threat of a chaotic no-deal exit for negotiating leverage, we think she, her government and Parliament, will ultimately ensure a no-deal scenario doesn't become a reality. Unless the EU concedes on the Irish backstop (very unlikely), or unless Parliament musters up sufficient consensus for an alternative Brexit plan (possible, but looking like a stretch), a new referendum would likely be the destination. Any sure sign that a no-deal Brexit is off the table would likely spark a potentially significant rally in the pound.

    [USD, CHF]
    EUR-CHF clocked an 11-week high at 1.1429. This extends a phase of relatively high volatility that the franc has seen, which has seeing several periods of pronounced underperformance, which have often been accompanied by talk/suspicions of SNB intervention. SNB Chairman Jordan said last week that "current monetary policy is the right one and we will continue to with it for some time." He said 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. SNB vice president, Zurbruegg, also said last week 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."

    [USD, CAD]
    USD-CAD tumbled to a near three-month nadir, at 1.3118, driven primarily by broad U.S. Dollar weakness after the Fed went neutral on policy, and also a Canadian-Dollar supportive rally in oil prices, which hit 10-week highs. We advise trend-following for now, but stay alert to developments on the U.S-China trade front. Canadian GDP for November is up today. The economy is on track to contract 0.1% in November (m/m, sa) as the sharp decline in oil prices materially impacted the economy. USD-CAD has resistance at 1.3161-63, and support at 1.3099-1.3100.

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