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By XE Market Analysis July 3, 2019 7:27 am
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    XE Market Analysis: North America - Jul 03, 2019

    The Dollar has been trading steady-to-softer against the other main currencies, arriving at the New York interbank open near net unchanged against the Euro, with the common currency managing to recoup from intraday losses, modestly lower versus the Yen and Australian Dollar, and firmer in the case against the Pound, which has remained heavy following sub-forecast UK services PMI data. EUR-USD found a footing after diving to a two-week low at 1.1268 during the early London session as markets there took a turn in reacting to the news that IMF's Lagarde will become the new head of the ECB, replacing Mario Draghi. Lagarde in her position at the IMF repeatedly backed and called for ongoing or further ECB policy support, although partly at play is a degree of relief that the hawkish-leaning Bundesbank President Weidmann hasn't become the central bank's new boss. USD-JPY extended to a one-week low, at 107.53. Most Yen crosses also traded lower as the Yen picked up a degree of safe-haven demand as stock markets headed south after the U.S. Trade Representative's office announced an expanded list of European products that could be subject to tariffs. The Pound remained an underperformer, although the miss in the UK's June services PMI report didn't produce fresh lows as it was anticipated by market participants following the big misses in already-released construction and manufacturing PMI surveys. Cable dipped to 1.2558 low in the wake of the release before recouping some, leaving the earlier two-week low at 1.2557 unchallenged. A relatively big bloc of data is due out of the U.S. today, where markets will close early ahead of tomorrow's July 4th public holiday.

    [EUR, USD]
    EUR-USD found a footing after diving to a two-week low at 1.1268 during the early London session as markets there took a turn in reacting to the news that IMF's Lagarde will become the new head of the ECB, replacing Mario Draghi. Lagarde in her position at the IMF repeatedly backed and called for ongoing or further ECB policy support, although partly at play is a degree of relief that the hawkish-leaning Bundesbank President Weidmann hasn't become the central bank's new boss. We expect a continued neutral-to-declining bias over the coming phase for EUR-USD. Bigger picture, the pairing has been in a bear trend since early 2018, though downside momentum has abated markedly in recent months, with a rough equilibrium looking to have established. Resistance comes in at 1.1344-47. A relatively big back of data is due out of the U.S. today, where markets will close early ahead of tomorrow's public holiday.

    [USD, JPY]
    USD-JPY extended to a one-week low, at 107.53. Most Yen crosses also traded lower as the Yen picked up a degree of safe-haven demand as stock markets headed south in Asia. This was seen as a consequence of fading optimism about the U.S.-China trade war truce. For one, the U.S. Trade Representative's office announced an expanded list of European products that could be subject to tariffs. For two, as we an others had pointed out, fundamental difference around industrial strategy and national security issues remain, and with 11 rounds of trade talks having come and gone, it remains unclear whether a new round of talks will produce a breakthrough. USD-JPY has resistance at 108.04-07.

    [GBP, USD]
    The Pound has remained heavy, although the miss in the UK's June services PMI report didn't produce fresh lows as it was anticipated by market participants following the big misses in already-released construction and manufacturing PMI surveys. Cable dipped to 1.2558 low in the wake of the release before recouping some, leaving the earlier two-week low at 1.2557 unchallenged. EUR-GBP printed a four-session high at 0.8980, nearing last week's six-month high at 0.8992. The June UK services PMI disappointed at 50.2, a three-month low and dropping from May's 51.0 reading. The median forecast had been for a more modest decline to 50.6. The June composite PMI worked out at 49.2, dropping sharply from May's 50.7, dragged lower by weak construction and manufacturing components. This is the first time since July 2016 that the composite PMI has been below the 50.0 mark. Overall, the June PMI data paint a picture of an economy in stagnation and at risk of tipping into recession; a consequence of both Brexit-related uncertainty and slowing economic activity in continental Europe. As for Brexit, the news flow has remains quiet in terms of substantive developments. That will change as soon as the new prime minister, most likely no-deal-Brexit-if-necessary Boris Johnson, takes up the reigns (which should be by mid month). 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 1.2610-13.

    [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 has become rooted in a consolidation around 1.3100-50, which follows a period of sharp declines from the late-May high at 1.3565. A combo of rallying oil prices and rising Fed easing expectations had driven the decline. This two forces have now abated substantially (oil prices are down nearly 6.5% from Monday's highs), and we expect the pairing to remain underpinned over the next phase. This should keep USD-CAD's eight-month low seen last week at 1.3059 out of reach for now. Support comes in at 1.3128-30.

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