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By XE Market Analysis July 16, 2019 7:13 am
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    XE Market Analysis: North America - Jul 16, 2019

    The Dollar has remained buoyant, posting fresh highs versus the Euro, Sterling and some other currencies. This comes amid some position readjusting with markets bracing for an incoming tide of Q2 corporate earnings results and a hefty slate of U.S. data releases this week, which will collectively paint an updated picture of the impact that trade protectionism has been having. EUR-USD declined for a second day, this time posting a three-session low at 1.1227. A sub-forecast German ZEW investor confidence reading added offers on the Euro, though the firmer Dollar has been the dominant driver. Elsewhere, the Pound has underperformed for a second straight day, and was showing a 0.5% loss against both the Dollar and Yen at levels prevailing just ahead of the New York interbank open, and a 0.3% decline in the case against the euro. The underperformance has come despite warmer than expected income data out of the UK, which was offset by a jump higher in jobless claims. Brexit-related uncertainty and political developments that have increased the odds for a no-deal exit scenario continue to preoccupy the market mindset with regard to Sterling. Cable punched out a 27-monht low at 1.2408, and EUR-GBP lifted to a fresh six-month high, at 0.9042. USD-CAD edged out a four-session high at 1.3064, putting in a little distance from the nine-month low seen on Friday at 1.3022. USD-JPY posted a high at 108.10, which is 1 pip shy of the high seen yesterday.

    [EUR, USD]
    EUR-USD has declined for a second day, this time posting a three-session low at 1.1227. A sub-forecast German ZEW investor confidence reading added offers on the Euro, though a generally firming Dollar has been the dominant driver. This comes amid some position readjustments with markets bracing for an incoming tide of Q2 corporate earnings results and a hefty slate of U.S. data releases this week, which will collectively paint an updated picture of the impact that trade protectionism has been having. As for Fed easing expectations, Fed funds futures have fully priced in a 25 bp rate cut for July 31, and then some, with the August implied trading at 2.08%. As for the Euro side of the equation, there remain reasons to be not-too-bullish, including the economic-slowing impact of Brexit-related uncertainty, which has been affecting activity on both sides of the channel. Upcoming ECB meetings, starting with the one next week, have shift to a "live" status, with the central bank considering a gear-shift to an explicit easing bias.

    [USD, JPY]
    USD-JPY posted a high at 108.10, which is 1 pip shy of the high seen yesterday. In equity markets, most of the main Asian indexes have posted moderate gains, though Chinese shares came under pressure in late PM trading, while most European bourses rose. U.S. Treasury Secretary Mnuchin made positive remarks about progress in trade talks, while markets are bracing for an incoming tide of Q2 corporate earnings results and a hefty slate of U.S. data releases this week, which will collectively paint an updated picture of the impact that trade protectionism has been having. USD-JPY has been in a bear trend for some 12 weeks now, declining in the latest week after rising over the prior two weeks. Resistance comes in at 108.45-48. Japan's calendar this week brings the June trade report (Thursday), where a JPY 300.0 bln surplus is expected. The June national CPI (Friday) is forecast to cool to 0.6% y/y from 0.7% overall, and to 0.6% y/y from 0.8% on a core basis. The May all-industry index (Friday) is penciled in at 0.2% m/m from 0.9%.

    [GBP, USD]
    The Pound has underperformed for a second straight day, and was showing a 0.5% loss against both the dollar and yen at levels prevailing just ahead of the New York interbank open, and a 0.3% decline in the case against the euro. The underperformance has come despite warmer than expected income data out of the UK, which was offset by a jump higher in jobless claims. Brexit-related uncertainty and political developments that have increased the odds for a no-deal exit scenario continue to preoccupy the market mindset with regard to sterling. The UK will have a new prime minister next week, with the Conservative Party's leadership party concluding next Tuesday. Boris Johnson is almost certain to become the new boss. He has been emphasizing that he is fully intent on the UK leaving the EU without a deal as his base position, hoping that this will see Brussels waiver on its red lines while maintaining that the no-deal option will be taken if necessary. This backdrop is keeping pressure on the pound, which we estimate to have been trading at a 10-15% discount since the vote to leave the EU in June 2016.

    [USD, CHF]
    EUR-CHF has put in a couple of weeks of steady, range-bound trading after dropping sharply in mid June as markets adjusted to increased prospects for the ECB to return to the dovish policy tap. The cross printed a two-year low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will 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 last 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 edged out a four-session high at 1.3064, putting in a little distance from the nine-month low seen on Friday at 1.3022. We still judge the pair to be amid a distinct bear trend that's been unfolding since late May, having declined in five of the last six weeks. Trend resistance comes in at 1.3071-73. The Fed's course to policy easing has been driving the downward bias. As for the BoC, the central bank maintained a neutral bias last week as it delivered the widely expected no change in the 1.75% rate setting. Officials did however emphasize that the trade and geopolitical backdrops are clouding the outlook. Policy remains data driven for the BoC, which will "pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation." Canada's data docket this week will provide the latest update on inflation, with June CPI due today. We expect CPI to pull-back 0.4% in June (m/m, nsa) after the 0.4% gain in May, as gasoline prices were sharply lower during the month. CPI on an annual comparable basis (y/y) is projected to slow to a 1.8% growth rate from the 2.4% clip in May. The BoC expects CPI to slow in Q3 as the temporary factors boosting CPI in Q2 unwind.

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