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By XE Market Analysis July 5, 2019 7:29 am
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    XE Market Analysis: North America - Jul 05, 2019

    The Dollar took a rotation high during the Asian and European AM sessions. EUR-USD printed a 15-day low at 1.1255, retracing nearly 75% of the gains since the Fed's policy statement in mid June. While the Fed remains on course to cut rates on July 31, forex markets have been adjusting to competing dovish turns at other central banks. In the Euro's case, market narratives have been centering on weak data (the latest being a 2.2% m/m contraction in May German manufacturing orders) and the dovish credentials of new ECB boss designate, Lagarde, which have tipped Bund yield curve into negative right out to the 20-year maturity, while the 10-year yield has been flirting with -0.400%. Some pre-U.S. jobs position trimming has also been the mix. Elsewhere, USD-JPY lifted to a three-day high of 108.06, and Cable posted a 16-day low at 1.2549, making this the fourth lower-low producing day out of the last five. USD-CAD lifted back above 1.3050 after posting a fresh nine-month low at 1.3037 yesterday. A softening in oil prices looks to have helped take some of the wind out of the Canadian dollar's sails. Both the U.S. and Canada release their June employment reports today. The U.S. data comes with downside risk from initial claims as auto retooling begins, and producer sentiment indicators have shown a June pull-back. The vehicle sector should be a drag as well, as both the assembly rate and vehicle sales take back some of their May gains. We expect a 160k June nonfarm payroll rise (median 165k) after the disappointing 75k increase in May.

    [EUR, USD]
    EUR-USD printed a fresh 15-day low at 1.1255, driven by broad Dollar gains.The pair has now retraced nearly 75% of the gains seen after the Fed's policy statement in mid June. While the Fed remains on course to cut rates on July 31, forex markets have been adjusting to competing dovish turns at other central banks. In the Euro's case, market narratives have been centering on weak data (the latest being a 2.2% m/m contraction in May German manufacturing orders) and the dovish credentials of ECB boss designate, Lagarde, which have tipped Bund yield curve into negative right out to the 20-year maturity, while the 10-year yield has been flirting with -0.400%. Some pre-U.S. jobs position trimming has also been the mix. EUR-USD has support at 1.1240-42, and resistance at 1.1305-08.

    [USD, JPY]
    USD-JPY lifted to a three-day high of 108.06 amid a Dollar-bid environment ahead of the June U.S. jobs report release. Bigger picture, the pair is entrenched in a rough 106.50-108.50 range. The BoJ's bias to policy stimulus remains ongoing, while the Fed's establishing easing bias along with risk of bouts of risk aversion in global markets (trade protectionism, Iran, North Korea) the odds look greater for a downside breakout than upside break. USD-JPY has resistance comes in at 108.50-53.

    [GBP, USD]
    Cable posted a 16-day low at 1.2549, making this the fourth lower-low producing day out of the last five and setting up a second consecutive down week. A combo of Sterling underperformance and Dollar outperformance has been at play today, coming as the U.S. June jobs report looms. EUR-GBP concurrently lifted back above 0.6970, drawing back in on the one-week high seen on Wednesday, and last week's six-month high, at 0.8990 and 0.8992, respectively. A 0.3% m/m contraction in the Halifax measure of UK house prices for June followed PMI survey data for the same month that laid bare the impact of both prolonged Brexit-related uncertainty and slowing economic activity in continental Europe. The June composite PMI fall sharply to 49.2 from May's 50.7, signalling an economy in contraction. 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 lifted back above 1.3050 after posting a fresh nine-month low at 1.3037 yesterday. A softening in oil prices looks to have helped take some of the wind out of the Canadian dollar's sails. Focus today is no the release of June employment reports out of both the U.S. and Canada, which present downside risks to USD-CAD as downside risk abounds with regard to the U.S. release from initial claims as auto retooling begins, and producer sentiment indicators have shown a June pull-back. The vehicle sector should be a drag as well, as both the assembly rate and vehicle sales take back some of their May gains. WE expect a 160k June nonfarm payroll rise (median 165k) after the disappointing 75k increase in May. We see a steady jobless rate alongside gains of 0.2% for hours-worked and 0.3% for hourly earnings (median same). Our June estimate is just below the 164k year-to-date average, and well under the 223k average in 2018. As of the Canadian jobs report, we expect a 20.0k rise (median 10.5k) in June after the 27.7k rise in May, continuing the modest improvements after the stunning record one-month gain of 106.6k in April. The unemployment rate is seen at 5.4% in June from 5.4% in May.

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