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By XE Market Analysis July 13, 2018 7:15 am
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    XE Market Analysis: North America - Jul 13, 2018

    The dollar and yen traded generally firmer against most other currencies, with the U.S. currency in turn outperforming its Japanese counterpart. In the mix was an underperformance by sterling, which has been affected by a swirling Brexit storm. EUR-USD posted an 11-day low at 1.1612, extending what is a now run of five consecutive down days, during which time both the 20- and 50-day moving averages have been breached. USD-JPY rallied to a fresh six-month high, of 112.80 as most global stock markets continued to rally, buoyed by a strong global economy and expectations for a solid Q2 corporate earnings reporting season. Chinese markets still underperformed, however, along with the Australian share market, on concerns about worsening Sino-U.S. trade relations. Cable printed an 11-day low at 1.3102, while EUR-GBP lifted to a three-day high of 0.8866. A Brexit storm is taking a toll on Her Majesty's currency, in part stirred up by President Trump's interview with the UK's Sun tabloid newspaper, where he said that the PM's Brexit plan, which aims to retain a close relationship with the EU, would mean that a free trade deal with the U.S. would be off the table.

    [EUR, USD]
    EUR-USD posted an 11-day low at 1.1612, extending what is a now run of five consecutive down days, during which time both the 20- and 50-day moving averages have been breached. The weightiness of the pair has mostly reflected a perkier dollar, while EUR-JPY having been on a diverging upward path on the back of general yen underperformance. We expect EUR-USD's downside tilt to persist for now, with the strong U.S. economic growth and the Fed's tightening course tipping 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 resistance is at 1.1645-47.

    [USD, JPY]
    USD-JPY rallied to a fresh six-month high, of 112.80 as most global stock markets continued to rally, buoyed by a strong global economy and expectations for a solid Q2 corporate earnings reporting season. Chinese markets still underperformed, however, along with the Australian share market, on concerns about worsening Sino-U.S. trade relations. The weakness in the yen in turn drove an outperformance in Japanese stock markets. In the mix has been a report that the BoJ will likely cut its long-term inflation projections, according to unnamed sources cited by Reuters, and will concede that CPI will likely remain below the 2% target for as long as three more years. The central bank will highlight structural factors capping inflationary price pressures. The BoJ meets on policy on July 30-31, when a quarterly revision of inflation and growth forecasts will also be published. This story partly explains the yen weakness today, reaffirming the underlying bullish credentials for USD-JPY, though the backdrop of risk-on sentiment in global asset markets has been the more dominant driver behind the decline in the Japanese currency over the last couple of sessions. Due to a net repatriation dynamic (and expectations for such among market participants) associated with Japan's massive current account surplus during pronounced risk-off phases in global markets, the yen acts as a low-beta safe-haven currency. USD-JPY has support at 111.70-71, and resistance at 113.38-40.

    [GBP, USD]
    Sterling has traded generally weaker today, losing ground to the dollar, yen and euro. Cable printed an 11-day low at 1.3102, while EUR-GBP lifted to a three-day high of 0.8866. A Brexit storm is taking a toll on Her Majesty's currency, in part stirred up by President Trump's interview with the UK's Sun tabloid newspaper, where he said that the PM's Brexit plan, which aims to retain a close relationship with the EU, would mean that a free trade deal with the U.S. would be off the table. This is a point that even critics of the President have conceded is technically valid, and as a BBC editor put it, Trump's interview had "driven a bulldozer" through Prime Minister May's claim that her Brexit plan would leave the UK free to secure free trade deals around the world. There is a general and growing realization that there will be significant economic costs to Brexit, and that an unstable government would risk the UK falling out of the EU without any new deal, which would come with the customs infrastructure unprepared and the immediate reversion to WTO trade terms rendering an instant erosion to the UK's trading position. We retain a bearish view of the pound. Cable's June-28 low at 1.3050 provides a downside waypoint. Resistance is at 1.3142-45.

    [USD, CHF]
    EUR-CHF printed a seven-week high of 1.1708, despite concurrent heaviness in EUR-USD. 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 settled below the 10-day high that was seen midweek at 1.3220. The BoC's 25 bp interest rate hike and guidance for tighter monetary policy to keep inflation near target met expectations, with the statement emphasizing a "gradual approach, guided by data." A big dive in oil prices, as Libya announced recommencing supply, brought some selling pressure onto the 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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