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By XE Market Analysis July 19, 2019 7:17 am
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    XE Market Analysis: North America - Jul 19, 2019

    The Dollar settled at firmer levels after the New York walked back the dovish remarks of Williams yesterday. The narrow trade-weighted USD index (DXY) was showing a near 0.3% gain heading into the New York interbank open, at 97.02, up from the 16-day low see late yesterday at 96.67. At the close yesterday, Fed funds futures were still discounting about a 40% chance for the Fed to cut by 50 bp, though this was down from near 70% odds being implied in the wake of Williams' speech. The biggest mover so far today has been EUR-USD, with the Euro coming under some pressure following a more benign than expected 1.2% y/y reading in June German PPI data, and with Italian bonds coming under pressure with Deputy Minister Salvini publicly flirting with the idea of calling a snap election. EUR-USD printed a low at 1.1230, which is 52 pips down on yesterday's post-Wiliams high. EUR-JPY, EUR-GBP and other Euro crosses also declined. USD-JPY, meanwhile, climbed back above 107.50 after yesterday printing a 24-day low at 107.21. The Pound consolidated gains it saw yesterday on news that backbench members of parliament passed an amendment, by a solid majority of 41, aimed at preventing the new prime minister from "proroguing" (i.e. suspending) parliament as a means to force a no-deal Brexit. Cable held in the lower-to-mid 1.2500s, off from the four-day high seen yesterday at 1.2558.

    [EUR, USD]
    EUR-USD settled near 1.1250 after posting a 12-day high at 1.1282. The pair continues to be buffeted by fine-tuning Fed policy expectations, the latest phase of which has been for increased emphasis on the possibility for an outsized 50 bp cut on July 31. This should keep the pressure on U.S. over Bund yield differentials and in turn keep EUR-USD underpinned, even though the ECB is concurrently heading toward gear-shifting to an explicit easing bias. At the moment, we take a neutral-to-bullish view of EUR-USD. The pair has trended lower from early 2018 through to March this year, but has since stabilized as the Fed's bias as re-oriented to the dovish side. Support comes in at 1.1193-95.

    [USD, JPY]
    USD-JPY climbed back above 107.50 after printing a 24-day low at 107.21. The price action reflected broader Dollar movement, with the U.S. currency finding footing after weakening during the New York PM session yesterday. We retain a bearish view of USD-JPY, with the Dollar trending lower as markets reassess the chances for an outsized Fed easing. Richly valued global stock markets also look vulnerable, given trade concerns and with Q2 corporate reports expected to show an earnings recession. USD-JPY has resistance at 107.70-72. The June-25 low at 106.77 provides a downside waypoint.

    [GBP, USD]
    The Pound has consolidated gains it saw yesterday on news that backbench members of parliament passed an amendment, by a solid majority of 41, aimed at preventing the new prime minister from "proroguing" (i.e. suspending) parliament as a means to force a no-deal Brexit. It may still be possible for the new PM -- which is almost certain pro-no-deal-Brexit Boris Johnson -- to pull off a proroguing manoeuvre, but the new amendment will make it difficult. This in turn could increase the odds for Boris, assuming he is anointed as the new leader next Tuesday, to risk calling a new general election, which some recent polls suggest would restore him as PM with Conservative Party majority of around 40. Given this, we don't advise taking a bullish view of the Pound at this juncture. Cable yesterday printed a four-day high at 1.2558, aided higher in party by weakening in the Dollar. Resistance comes in at 1.2561-63.

    [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 posted a fresh nine-month low at 1.3016 yesterday, driven by a shifting U.S. versus Canadian yield dynamic as markets re-consider the possibility for a large 50 bp rate cut by the Fed at the late July FOMC. This has helped offset recent sharp decline in oil prices, although news that the U.S. navy shot down an Iranian drove has now given crude markets an underpinning. We judge USD-CAD to be remaining in bear trend that's been unfolding since late May, with the pair having posted a lower weekly low for seven consecutive weeks now (including this one). Trend resistance comes in at 1.3064-66. 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."

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