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By XE Market Analysis July 12, 2018 7:14 am
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    XE Market Analysis: North America - Jul 12, 2018

    Yen weakness has been the dominant theme today amid a rebound in global asset markets after the steep losses of yesterday. USD-JPY rallied to six-month highs above 112.50 after breaking above the May high at 111.39. EUR-JPY lifted into two-month-plus high terrain, and AUD-JPY reversed the outsized losses the cross had seen yesterday (following Trump's threat to slap tariffs on a further $200 bln worth of Chinese imports). The yen's weakness reflects a unwinding in the currency's built-in safe haven premium, which has allowed market participants to re-focus on bullish fundamentals of USD-JPY (with the Fed on a tightening course while the BoJ remains fully committed to maintaining ultra-accommodative monetary policy). Elsewhere, EUR-USD has been in consolidation mode, holding a narrow range in the upper 1.1600s, above the five-session low posted yesterday at 1.1665.

    [EUR, USD]
    EUR-USD is hovering at near net unchanged levels, holding a range in the upper 1.1600s after the pair printed a five-session low yesterday at 1.1665. EUR-JPY, in contrast, has ramped to two-and-a-half-month highs, drawn higher by broad yen underperformance today. We continue to see EUR-USD as being in a broadly consolidative phase, which has been unfolding for over a month now, following a six-week down phase from levels above 1.2400. The range over this period has been 1.1508 to 1.1851. More of the same looks likely for now, though strong U.S. economic growth and the Fed's tightening course tip the fundamental balance in favour of the dollar, and so the downside of EUR-USD. Any move from Trump to follow-through on hits threats to tariff car imports would also be negative for the euro relative to the dollar. EUR-USD has support is at 1.1645-47.

    [USD, JPY]
    USD-JPY has rallied to a six-month high of 112.53 after breaking above the May high at 111.39. EUR-JPY, meanwhile lifted two-month-plus high terrain, and AUD-JPY reversed the outsized losses the cross had seen yesterday (following Trump's threat to slap tariffs on a further $200 bln worth of Chinese imports). The yen's weakness reflects a unwinding in the currency's built-in safe haven premium, as global stock markets and commodity prices rebound from sharp weakness yesterday, which has allowed market participants to re-focus on otherwise bullish fundamentals of USD-JPY (with the Fed on a tightening course while the BoJ remains fully committed to maintaining ultra-accommodative monetary policy). USD-JPY has support at 111.70-71, and resistance at 113.38-40.

    [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 has settled to the lower 1.1600s after posting seven-week high at 1.1659 earlier in the week. 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 rebounded to a 10-day high of 1.3220 from a 1.3063 low that was seen on a by-CAD reaction to the BoC's 25 bp interest rate hike and guidance for tighter monetary policy to keep inflation near target. However, the statement also emphasized a "gradual approach, guided by data." A 4%-plus dive in oil prices, as Libya announced recommencing supply, subsequently prompted selling of Canadian dollars, given the sensitivity of Canada's terms of trade position to crude prices. USD-CAD has support at 1.3150-53.

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