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By XE Market Analysis July 24, 2018 7:29 am
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    XE Market Analysis: North America - Jul 24, 2018

    The Dollar rose in Asia and then declined in the European AM session. EUR-USD recouped to around the 1.1700 after printing a two-session low of 1.1666 on the back of what had been broader Dollar gains (driven by a further rise in the U.S. 10-year T-note yield yesterday, which lifted to five-week highs and pushed towards the 3.0% level again amid speculation that Friday's advance U.S. Q2 GDP report will top the median forecast for 4.1% y/y growth). Sub-forecast preliminary July PMI data out of the Eurozone had limited impact today, and EUR-USD remains in a choppy, sideways range that's been unfolding for nearly two months now. USD-JPY has traded with little direction in the lower 111.0s after yesterday printing a three-day low at 110.75. Japanese exporters were reported buying yen during the early part of the Tokyo session today, which contributed to driving USD-JPY to an intraday low of 111.06. The pair subsequently lifted back some amid a backdrop of rallying stock markets in Asia, led by Chinese bourses on reports that Beijing will adopt a more "vigorous" fiscal policy, including corporate tax cuts. Tech stocks were also boosted by a stellar earnings report by Alphabet, the parent company of Google. The yuan fell, with the offshore version of the currency tumbling 0.6% to a 13-month low after the PBoC set the USD-CNY reference rate at 6.7891, which is the weakest level for the Chinese currency since July last year. In Japan, markets continued to digest yesterday's Reuters report that, according to sources, the BoJ is in "preliminary" discussions to tweak its stimulus program to make it more sustainable. The Japanese yield curve has steepened by 10 bp as a consequence, and the story is feeding a broader theme of dissipating central bank stimulus globally.

    [EUR, USD]
    EUR-USD recouped to around the 1.1700 after printing a two-session low of 1.1666 on the back of what had been broader Dollar gains (driven by a further rise in the U.S. 10-year T-note yield yesterday, which lifted to five-week highs and pushed towards the 3.0% level again amid speculation that Friday's advance U.S. Q2 GDP report will top the median forecast for 4.1% y/y growth). Sub-forecast preliminary July PMI data out of the Eurozone had limited impact today, and EUR-USD remains in a choppy, sideways range that's been unfolding for nearly two months now. The relative strength of the U.S. economy and the Fed's tightening course tips the balance of directional risk toward the downside, though President Trump's verbal interventions in Fed policy and forex rates is making the field tactically more challenging for Dollar bulls. Across the pond there are other wildcards; one stemming from the still-evolving populist political landscape in Italy, and another being the prevailing sense of risk for there being a no-deal Brexit scenario, with both carrying potential to disrupt the EU applecart. EUR-USD has support at 1.1633-35, and resistance at 1.1716-18.

    [USD, JPY]
    USD-JPY has traded with little direction in the lower 111.0s after yesterday printing a three-day low at 110.75. Japanese exporters were reported buying yen during the early part of the Tokyo session today, which contributed to driving USD-JPY to an intraday low of 111.06. The pair subsequently lifted back some amid a backdrop of rallying stock markets in Asia, led by Chinese bourses on reports that Beijing will adopt a more "vigorous" fiscal policy, including corporate tax cuts. Tech stocks in Asia were also boosted by a stellar earnings report by Alphabet, the parent company of Google. The yuan also fell, with the offshore version of the currency tumbling 0.6% to a 13-month low after the PBoC set the USD-CNY reference rate at 6.7891, which is the weakest level for the Chinese currency since July last year, despite Beijing yesterday saying that it won't be devaluing the yuan. In Japan, markets continued to digest yesterday's Reuters report that, according to sources, the BoJ is in "preliminary" discussions to tweak its stimulus program to make it more sustainable. The Japanese yield curve has steepened by 10 bp as a consequence, and the story is feeding a broader theme of dissipating central bank stimulus globally. The U.S. 10-year T-note yield is at five-week highs, pushing towards the 3.0% level again amid market speculation that Friday's advance U.S. Q2 GDP report will top the median forecast for 4.1% y/y growth, a backdrop that would have been -- until recently -- a bullish cue for USD-JPY.

    [GBP, USD]
    Cable has recovered above 1.3100 after earlier printing a two-session low of 1.3071. Yesterday's five-session high is at 1.3157, while last Thursday's 10-month low is at 1.2957. BoE MPC member Tenreyro said on Friday that recent economic data have shown that economic weakness in Q1 was a just a weather-related soft patch, though she refused to give away any more than that with regard to how she might vote at the upcoming August MPC meeting, noting that she will be watching incoming data closely. We continue to see directional risks to Cable as being greater to the downside than to the upside due to evident risk of a no-deal Brexit scenario. The UK's data calendar this week is relatively quiet, with the only highlights being provided by the July releases of the CBI industrial trends and distributive sales surveys (due Tuesday and Thursday, respectively). This will leave focus on Brexit, with the negotiations on UK's plan starting this week. The EU has already responded in the negative to the UK's plans for a common rulebook for goods a agri-foods, with the Union's chief negotiator Barnier questioning where this would be practical while remarking that the EU would not run the risk of weakening the single market. The pound is trading about 13-14% lower in trade-weighted terms since the vote to leave the EU back in June 2016, much of which represents the Brexit discount that market participants are demanding. We expect this discount to persist.

    [USD, CHF]
    EUR-CHF has been ebbing toward the 1.600 level since posting a two-month high last week at 1.1714, with the cross returning to midway levels of a sideways range that's been evolving since late May. The risk posed by Italy's Eurosceptic populist government to upset the EU applecart, along with risk of deepening trade protectionism, suggests the directional bias will remain skewed to the downside. Support is at 1.1535.

    [USD, CAD]
    USD-CAD has recouped to the upper 1.31s, up from the 1.3114 low posted in the wake of last Friday's above-forecast CPI and retail sales data out of Canada. Expectations for a 4%-plus U.S. Q2 GDP reading on Friday has been buoying the U.S. Dollar, and we expect this to remain the case for now. USD-CAD has support at 1.3153-55.

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