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By XE Market Analysis July 18, 2018 6:51 am
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    XE Market Analysis: North America - Jul 18, 2018

    The Dollar extended gains that was prompted by the upbeat remarks on the U.S. economy from Fed chair Powell yesterday. The narrow trade-weighted USD index (DXY) gained 0.4% in printing a three-week high at 95.39. EUR-USD descended to a two-week low at 1.1607, and USD-JPY ascended above 113.00 for the first time since January. USD-CAD posted a three-week high at 1.3251, which is a little north of the midway point of the range that's been seen over the last month. The Dollar also posted gains against the other Dollar bloc currencies, and many other currencies, including most emerging world currencies. Sterling underperformed, losing ground to the Euro and Yen, among other currencies, in addition to the outperforming Dollar. The losses were concomitant with a dive in UK yields following sub-forecast UK inflation data, which has dampened BoE tightening expectations. Cable hit a low of 1.3009, the lowest level seen since last September, while EUR-GBP printed a four-month high at 0.8923. UK June CPI unexpectedly held unchanged at 2.4% y/y versus the median forecast for a rise to 2.6% y/y, while core CPI fell to 1.9% y/y from 2.1% y/y in May, contrary to the median expectation for an unchanged reading.

    [EUR, USD]
    EUR-USD descended to a two-week low at 1.1607, extending the dollar-driven decline that was prompted by the upbeat remarks on the U.S. economy from Fed chair Powell yesterday. We have been, and remain, bearish of EUR-USD, based on strong U.S. economic growth and the Fed's tightening course, while any move from Trump to follow-through on hits threats to tariff car imports -- which he looks to be gearing up for, describing the EU as a "foe" last weekend -- would presumably be negative for the Euro relative to the Dollar. Former EUR-USD support at 1.1695-1.1700 now reverts as resistance. The July-2 low at 1.1591 provides the a downside waypoint.

    [USD, JPY]
    USD-JPY has ascended above 113.00 for the first time since January. The move was mostly driven by broader Dollar strength, which has been seen in the wake of Fed chair Powell giving an upbeat prognosis of the U.S. economy and outlook yesterday. This provided a fresh reminder of USD-JPY's underlying bullish fundamentals, which is rooted in contrasting policy outlooks for the Fed and BoJ. A report from last Friday that the BoJ will likely cut its long-term inflation projections, according to unnamed sources cited by Reuters, has continued to resonate. The sources suggested that the BoJ will concede that CPI will likely remain below the 2% target for as long as three more years, highlighting structural factors that are 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. Buoyant global stock markets, where overall upbeat Q2 corporate earnings, and expectations for more, have offset concerns about trade protectionism for now, which has seen the Yen's safe haven premium unwind some. USD-JPY has resistance at 113.38-40.

    [GBP, USD]
    Sterling dove concomitantly with UK yields on the inflation miss in UK data, presently showing an average loss of nearly 0.5% against the Dollar, Euro and Yen, although above lows. Cable hit a low of 1.3009, the lowest level seen since last September, while EUR-GBP printed a four-month high at 0.8923. UK June CPI unexpectedly held unchanged at 2.4% y/y versus the median forecast for a rise to 2.6% y/y, while core CPI fell to 1.9% y/y from 2.1% y/y in May, contrary to the median expectation for an unchanged reading. The data reduces the odds for the BoE to tighten at the August MPC meeting. One of the supporting arguments behind the BoE's guidance for gradual tightening is that a tight labour market and low productivity growth will conspire to drive wages and consumer prices up, though this clearly hasn't been transpiring yet. This comes with markets fretting about a disorderly Brexit process. BoE Governor Carney yesterday warned of "big economic consequences" to the economy in the event of a no-deal exit from the EU, although he stressed that it would be "premature" for the central bank judge things will proceed while emphasizing that the UK banking sector was appropriately capitalised for a over-the-cliff-edge Brexit scenario. Regarding BoE policy, our view is for a 25 bp hike in the repo rate to be announced on August 2, but this has now become a more tentative call, while any such move would likely accompanied with guidance for on hold policy thereafter.

    [USD, CHF]
    EUR-CHF has settled back in the mid 1.1600s, down from the eight-week high seen earlier in the week at 1.1714. 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 commáents 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 gained for a second day, posting a three-week high at 1.3242, which is a little north of the midway point of the range that's been seen over the last month. Fed chair Powell yesterday gave an upbeat view of the U.S. economy, which join the recent heavy declines in oil prices in forming a cocktail of bullish narratives for USD-CAD. We look for a revisit of the June highs at 1.3384-87. The pair has support at 1.3146-68.

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