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By XE Market Analysis July 17, 2017 7:26 am
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    XE Market Analysis: North America - Jul 17, 2017

    EUR-USD has settled in the mid 1.14s after edging out a three-session high at 1.1474 during thin Asian trade. While the pair logged 13-month highs last week, which was the culmination of a three-month rally phase, some momentum indicators are flagging, with the 14-day relative strength index, for instance, falling back despite the new highs. This is what the technically minded call bearish divergence, which can be a precursor of a trend shift. Trend support comes in at 1.1396-98. USD-JPY settled in the mid 112.0s after posting its first down week since early June last week. AUD-JPY, which rallied strongly last week to 19-month highs, traded softer, as did EUR-JPY. USD-CAD carved out a new 14-month low at 1.2640 during the thin Asia session, extending extends the latest down phase that was catalysed by last week's BoC rate hike. AUD-USD found demand just ahead of 0.7800, aided by a running bid in mining stocks following forecast-beating Q2 GDP data of China, which follows last week's solid trade report for May. The pair remains down on the day, by 0.2%, but remains within 30 pips or so of Friday's 15-month peak at 0.7834. The Aussie buck on Friday closed above the 0.7800 for the first time on a weekly basis since May 2015.

    [EUR, USD]
    EUR-USD has settled in the mid 1.14s after edging out a three-session high at 1.1474 during thin Asian trade. While the pair logged 13-month highs last week, which was the culmination of a three-month rally phase, some momentum indicators are flagging, with the 14-day relative strength index, for instance, falling back despite the new highs. This is what the technically minded call bearish divergence, which can be a precursor of a trend shift. Trend support comes in at 1.1396-98. Regarding fundamentals, any chance of another Fed rate hike before year end was kicked into 2018 following weak U.S. inflation data for June on Friday. However, we still think the next direction phase of EUR-USD will be biased to the downside. The ECB is likely to stick to the June script and try to calm tapering nerves at its meeting on Thursday, with the drop in Eurozone HICP inflation to just 1.3% y/y in June strengthening the arguments of the doves.

    [USD, JPY]
    USD-JPY as settled in the mid 112.0s after posting its first down week since early June last week. AUD-JPY, which rallied strongly last week to 19-month highs, is also trading softer, as is EUR-JPY. We have been advocating a bullish view of USD-JPY, based on the Fed's gradualist tightening path, which has been giving the dollar a yield advantage while maintaining a risk-on backdrop in global equity markets.

    [GBP, USD]
    Sterling has settled to a consolidation after rallying last week. After a period of underperformance, the pound found respite amid secular weakening in the dollar and euro over the last week, though BoE policymaker remarks and UK data were mixed. BoE MPC member McCafferty, a long-term hawk, argued that the central bank needs to consider QE tapering, while his colleague Broadbent said he was not ready to hike rates, and talked at length during a speech about the risks that a "bad" Brexit would have on UK costs and income. This week's UK schedule brings the June inflation report (Tuesday), where we expect headline CPI to remain at 2.9% y/y (median same), a four-year high. The sharp y/y weakening in sterling following the Brexit vote in June last year has kindled inflation, and at least three of the current eight member MPC committee (normally nine, with one position currently vacant) now itching to reverse last August's 25 bp cut in the repo rate. Official retail sales for June (Thursday) has us expecting a 0.2% m/m rebound after the sharp 1.2% contracting on May (median 0.3%). Despite signs of a hawkish awakening at the BoE, we remain bearish of sterling, wary of PM May's much weakened government to successfully navigate the tricky and unseen waters of Brexit.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.10s after logging a 10-month high at 1.1073 last week. The cross remains about 1.5% up on levels prevailing in late June, having gained amid a broader bid in the euro following a batch of signals from ECB policymakers that have collectively affirmed that policy tapering is on the table. The policy shift will be welcome by Swiss policymakers after Switzerland's inflation dipped to just 0.2% y/y in June data, down from 0.5% in May and threatening a return of deflation. The price data would have rekindled the SNB's desire for a weaker franc, having stressed at its June policy review that the currency remains "significantly" overvalued.

    [USD, CAD]
    USD-CAD carved out a new 14-month low at 1.2640 during the thin Asia session. This extends the latest down phase, catalysed by last week's BoC rate hike, while the new low is the culmination of a down phase that's been in play since mid May, over which time the Canadian economy has showed consistent signs of improvement while BoC policymakers have been expressing the view that the drag from the oil-related shock in recent years has now passed. We recommend a trend following strategy for now with weak U.S. inflation data for June having all but kicked Fed tightening possibilities out of 2017 and into 2018. Trend resistance is at 1.2796-98. The May 2015 low at 1.2461 provides a downside reference marker.

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