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By XE Market Analysis July 10, 2018 7:12 am
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    XE Market Analysis: North America - Jul 10, 2018

    The dollar has firmed up while the yen has underperformed. The solid U.S. jobs report last Friday and expectations for a strong corporate earnings season have been buoying equities, although Chinese share markets have continued to underperform, and there is a palpable underlying sense that the U.S.-led trade way with major economies is curtailing bullish sentiment. The pound settled lower, with an unexpected contraction in UK May production data following news, late yesterday, that British Foreign Secretary Boris Johnson resigned in protest of the "soft Breixt" approach the Cabinet voted on on Friday. There are concerns that this could turn into a crisis at the Tory party, which could see a leadership challenge, with Johnson the challenger. Cable has settled in the lower 1.3200s. EUR-USD, meanwhile, fell to a two-session low of 1.1713, extending the correction from yesterday's three-week high at 1.1790. USD-JPY broke above recent range highs and printed a seven-week high at 111.29. EUR-JPY and other yen crosses are also up, with EUR-JPY trading in seven-week high terrain and AUD-JPY making one-month highs.

    [EUR, USD]
    EUR-USD printed a new two-session low at 1.1721, extending the retreat from the three-week high seen yesterday at 1.1790. A broad dollar bid has driven the move, with demand having picked up out of recent lows. We continued to see EUR-USD as being in a broadly consolidative phase, which has been unfolding for over a month now, and which followed a six-week down phase from levels above 1.2400. The range over this sideways period has been 1.1508 to 1.1851. More of the same looks likely for now. A major "known unknown" is to how deep and how prolonged the Trump-led trade war with major economies will be, and what economic and currency market fallout this will cause. This is, for now, curtailing directional commitment.

    [USD, JPY]
    USD-JPY has broken above recent range highs and printed a seven-week high at 111.29. EUR-JPY and other yen crosses are also up, with EUR-JPY trading in seven-week high terrain and AUD-JPY making one-month highs. The driver of the yen's underperformance is the continued rebound in global stock markets, although Chinese shares continue to underperform. The solid U.S. jobs report last Friday and expectations for a strong corporate earnings season have been buoying equities, and while the shift toward trade protectionism remains at the top of the worry list of investors, the level of implemented tariffs so far is small in the scheme of things. BoJ Governor Kuroda yesterday repeated that the central bank will remain committed to ultra-accommodative monetary policy, including yield-curve control, until inflation hits the 2% target. USD-JPY has support at 110.88-90 while the May-21 high at 111.39, which is the highest level seen since mid January, provides an upside waypoint.

    [GBP, USD]
    Cable has settled lower in the wake of an unexpected contraction in m/m UK industrial production data for May and on news, late yesterday, that British Foreign Secretary Boris Johnson resigned in protest of the "soft Brexit" approach the Cabinet voted on on Friday (particularly the aim to retain a free goods market arrangement with the EU). Johnson's move followed the resignation of Brexit Secretary David Davies, and there concern is that this could develop into to a Tory party crisis and leadership challenge, with Johnson as the challenger. Johnson is of course the "hard Brexit" camp's political heavyweight. All this is happening with just five negotiating weeks left until October, when both the UK and the EU are looking to wrap things up ahead of Brexit-Day on 29th March next year. Since the vote to leave in June 2016 the pound has consistently reacted negatively to news that suggested a momentum was shifting towards a "hard" Brexit scenario, and we estimate the market has built in about a 10-15% discount to the pound's trade-weighted value. Cable dove on Johnson's resignation from levels above 1.3300 to a low of 1.3188, before settling in the mid 1.3200s. We anticipate the pound will remain a sell-on-rallies trade.

    [USD, CHF]
    EUR-CHF logged a seven-week high at 1.1659 before turning lower amid EUR-USD's pullback. SNB's Maechler said late last month that the franc "remains highly valued" despite the depreciation seen over the last year, arguing that "we are in extraordinary times and we are using unconventional measures." The comments affirm that the SNB is firmly on hold, with Maechler admitting that the SNB's monetary policy room for manoeuvre is "necessarily" affected by the actions of ECB and Fed.

    [USD, CAD]
    USD-CAD has recouped back above 1.3100 after yesterday posting a three-week low at 1.3066, which extended the correction from a one-year high that was pegged at 1.3387 in late June. Expectations for the BoC to hike rates this week, along with the big surge in oil prices have being buoying the Canadian dollar, though this theme has now looked to have come to a pause. We expect the BoC to hike interest rates on Wednesday by 25 bp, which would take the overnight target rate to 1.50%. The accompanying monetary policy report should be consistent with additional rate increases, though at a gradual pace. USD-CAD has support at 1.3053-55, and resistance at 1.3150-53.

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