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By XE Market Analysis July 1, 2019 7:24 am
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    XE Market Analysis: North America - Jul 01, 2019

    The Dollar has rotated higher amid a strong post-G20 risk-back-on theme, interpreted by markets as meaning that the Fed is less likely to cut rates aggressively. Many market narratives promoted the view that the latest truce in the U.S.-Chain trade war will at the least kill off any lingering idea that the Fed may cut rates by as much as 50 bp in July. The return to the negotiating table of the world's two biggest economies was tonic for global stock markets, more than than offsetting weak PMI manufacturing data out of both Asia and Europe. The USD index (DXY) rallied by nearly 0.5% in making a 10-day high at 96.60. New highs were seen in early Asia-Pacific trading and then again after London markets had opened. EUR-USD printed a 10-day low at 1.1316, while Cable and AUD-USD also tracked lower. USD-CAD edged out a two-session high at 1.3108. USD-JPY surged to a 12-day high at 108.52, while EUR-JPY and AUD-JPY, among other Yen crosses, also rallied before subsequently unwinding. The Trump and Xi meeting at the G20 was more conciliatory than many expected. Trump described China as a "strategic partner" while holding off on new tariffs and easing restrictions on tech company Huawei. China agreed to make unspecified new purchases of U.S. farm products. But, Trump emphasized that the holding back on new tariffs was only "for the the being," and, with regard to Huawei, said that the company will remain on the blacklist. Fundamental difference around industrial strategy and national security remain, specifically U.S. assertion that China is cheating its way to tech dominance. With 11 rounds of trade talks having come and gone, it remains unclear whether a new round of talks will produce a breakthrough.

    [EUR, USD]
    EUR-USD printed a 10-day low at 1.1316, driven by broad Dollar gains as the renewed truce in the U.S.-China trade war ignited a lowering in Fed easing expectations. This should leave the one-month high seen last week at 1.1412 out of reach for now, and we expect a neutral-to-declining bias over the coming phase. Bigger picture, EUR-USD has been in a bear trend since early 2018, though downside momentum has abated markedly in recent months, with the pairing looking to have found a rough equilibrium. Support comes in at 1.1344-47.

    [USD, JPY]
    USD-JPY surged to a 12-day high at 108.53, while EUR-JPY and AUD-JPY, among other Yen crosses, also rallied as the Japanese currency saw some of is safe-haven premium unwind following the latest truce in the U.S.-China trade war, which marked a return to negotiations. The Yen subsequently rebounded some. The U.S. and China agreed on Saturday to restart trade talks in what was more many observes a more conciliatory than expected meeting, with Trump describing China as a "strategic partner." President Trump offered concessions to President Xi, holding off on new tariffs while easing of restrictions on tech company Huawei. China agreed to make unspecified new purchases of U.S. farm products and return to the negotiating table. But, Trump emphasized that the holding back on new tariffs was only "for the the being," and, with regard to Huawei, said that the company will remain on the blacklist, and that its future won't be decided until end of trade talks. Key difference around industrial strategy and national security remain, however, particularly U.S. accusation that China has been cheating its way to tech dominance. With 11 rounds of trade talks having come and gone, it remains unclear whether these differences can be resolved. For now, USD-JPY's directional bias looks to be toward the upside. Support comes in at 108.04-07.

    [GBP, USD]
    Sterling was hit by a double whammy of a generally firmer Dollar and by a much worse than expected manufacturing PMI survey out of the UK today. The net outcome was Cable dropping over 0.5% to a 12-day low at 1.2625. EUR-GBP also traded higher, but the cross remained shy of the five-day high seen on Friday at 0.8992. The June UK manufacturing PMI dove to a 76-month low of 48.0 in the headline reading, dropping much more sharply than expectations from May's 49.4. The median forecast had been for a much more modest decline to 49.2. The data shows that the sector is continuing to contract following the marked stockpiling-driven expansion seen ahead of the original Brexit date in late March. At 48.0, the indicator is at its lowest level since February 2013 after posting its first back-to-back sub-50.0 reading since the Q1 of the same year. The month-on-month contraction was also the most rapid monthly decline seen since 2012. A combo of high inventories and declining new orders drove the contraction in activity, adding to the familiar themes of Brexit-related uncertainty and slowing economic growth in continental Europe, while the survey also highlighted a fall in demand from the U.S. and Australia. Even allowing of the inventory dynamic, the data paints a picture of an economy sputtering along. We estimate that the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and don't see much scope for this to reverse anytime soon. Cable has resistance at 1.2650-52.

    [USD, CHF]
    EUR-CHF has found a footing after coming under signifiant pressure last week, in the wake of ECB President Draghi's eyebrow raising dovish shift, which has been the most notable of a growing chorus of dovish voices on the central bank's governing council. The cross printed a 23-month low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will doubtlessly be displeasing to the SNB (the EUR-CHF cross being a good proxy on the Swiss currency's trade weighted value). The SNB restated at its quarterly policy review this month that downside risks to the economy have increased, and that the overall policy setting "remains as expansionary as before." The central bank also nudged its inflation forecast lower, now expecting CPI to average just 0.6% y/y this year, 0.7% in 2020, and 1.1% y/y in 2021. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. Assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a declining bias. The SNB's -0.75% deposit rate and threat of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

    [USD, CAD]
    USD-CAD edged out a two-session high at 1.3108, driven by a U.S. Dollar-bullish shift in U.S. over Canadian yield differentials as markets price-in a less extensive path of Fed easing following news of the latest truce in the U.S.-China trade war. The pair last week printed an eight-month low at 1.3059. While both the U.S. and China offered concessions, and will return to the negotiating table, key difference around industrial strategy and national security remain, particularly the U.S. accusation that China has been cheating its way to tech dominance. With 11 rounds of trade talks having come and gone, it remains unclear whether these differences can be resolved. Another variable USD-CAD market participants will be monitoring is oil prices, which have surged nearly 3% today. This should curtail USD-CAD's upside potential. The pair has resistance at 1.3128-30, and support at 1.3080-85.

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