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By XE Market Analysis June 11, 2019 6:58 am
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    XE Market Analysis: North America - Jun 11, 2019

    Sterling outperformance alongside Yen underperformance provided side themes to an otherwise directionally subdued day so far, with the Dollar for the most part consolidating the moderate gains seen yesterday. USD-JPY was floated by broad Yen weakness amid a backdrop of a continued relief rally in equity markets in Asia and Europe, which has seen some more of the risk-off premium built into the Japanese currency's valuation unwind. The pair pegged a fresh 11-day high at 108.73, and EUR-JPY printed a three-week high. The biggest mover has been GBP-JPY, which rose over 0.5%, partly reflecting Pound outperformance in the wake of perkier than expected wage numbers out of the UK. Despite President Trump yesterday threatening to hit China with fresh tariffs should he fail to make progress with President Xi at the G20 later in the month, and despite Beijing responding today with threats of retaliation, Chinese markets led gains across Asian equity bourses, with the CSI 300 index closed with a stellar 3.0% advance. Helping underpin were remarks from Beijing that local governments would be able to tap funds raised from special bonds to use in major investment projects. Japan's Nikkei 225 gained a relatively modest 0.3%. The pan-Europe Stoxx 600 was up 0.9% as of the early PM session. Elsewhere, EUR-USD maintained a narrow range in the lower 1.1300s after rotating lower from Friday's 12-week high at 1.1347. Cable printed a two-day high at 1.2727 after above-forecast UK wage data and with BoE MPC hawk Saunders reminding markets that prevailing Brexit uncertainty won't necessarily stop the central bank from tightening policy (though few expect a move anytime soon). Focus now shifts to the pending release of U.S. PPI data.

    [EUR, USD]
    EUR-USD has been maintaining a narrow range in the lower 1.1300s after rotating lower from Friday's 12-week high at 1.1347. Recent price-movement dynamics have mostly reflected dollar volatility, which dove in the wake of Friday's weaker than anticipated U.S. May jobs report (exacerbating fears that slowing in manufacturing and capex on trade uncertainties are spilling over to the broad economy and labor market), before rallying back on the news that the U.S. and Mexico have reached a deal on migration, which allayed investor concerns on trade and igniting a 6bp-odd spike in the 10-year U.S. T-note yield. This came after EUR-USD posted a 1.5% rise last week, the biggest weekly advance since August last year. The pair now looks stuck without strong directional impulse. U.S. inflation figures this week are the biggest market-moving risk this week, along with retail sales at the end of the week. We estimate Wednesday's release of CPI to come in with a 0.1% May gain in the headline reading with a 0.2% increase in core prices, following respective April readings of 0.3% and 0.1%. This would translate to a headline y/y gain of 1.9%, down from 2.0% in April, which should maintain Fed easing expectations. EUR-USD has support at 1.1276-78, and resistance at 1.1347-50.

    [USD, JPY]
    USD-JPY has been floated by broad Yen weakness amid a backdrop of a continued relief rally in equity markets in Asia and Europe, which has seen some more of the risk-off premium built into the Japanese currency's valuation unwind. The pair pegged a fresh 11-day high at 108.73, and EUR-JPY printed a three-week high. The biggest mover has been GBP-JPY, which rose over 0.5%, partly reflecting Pound outperformance in the wake of perkier than expected wage numbers out of the UK. Despite President Trump threatening to hit China with fresh tariffs should he fail to make progress with President XI at the G20 later in the month, and despite Beijing responding with threats of retaliation, Chinese markets led gains across Asian equity bourses, with the CSI 300 index closed with a stellar 3.0% advance. Helping underpin were remarks from Beijing that local governments would be able to tap funds raised from special bonds to use in major investment projects. Japan's Nikkei 225 gained a relatively modest 0.3%. USD-JPY has this week breached above its prior-week peak for only the second time out of the last seven weeks. We expect the pair to continue to hold a better footing for now, especially with the planned meeting between top-level U.S. and Chinese officials at the upcoming G20 serving to arrest what had started seem an irrevocable downward spiral in relations between Washington and Beijing. USD-JPY has support 108.32-35, and resistance at 108.91-94.

    [GBP, USD]
    Sterling vaulted higher on the UK perky wage data, which provided interbank and short-term speculative participants to put a squeeze on short positions, especially with the data coming after BoE MPC hawk Saunders reminded markets that prevailing Brexit uncertainty won't necessarily stop the central bank from tightening policy, if it were necessary to anchor inflation. The pound had yesterday taken a wallop following the big miss in April GDP and production data out of the UK. Cable has rallied over 30 pips in the wake of the labour repot release, matching yesterday's high at 1.2724 and extending the rebound from yesterday's 1.2653 low. Average UK household income in the three months to April came in at 3.1% y/y in the including-bonus metric, slightly surpassing the median forecast for 3.0%. This came with the unemployment rate remaining unchanged at 3.8%, which is the lowest rate sine October-December 1974, while the employment rate came in at 76.1%, the joint-highest on record. A good degree of wariness is warranted as anecdotal evidence and the more timely employment components in the May PMI surveys point to a deterioration in labour market conditions. The robust April employment data belies an economy sputtering amid prolonged political and associated Brexit uncertainty, along with a slowing economies in continental Europe. We don't seen much upside potential for the pound at this juncture, especially with arch Brexiteer Boris Johnson favourite to become the new prime minister. "BoJo" is running his campaign on a hard, no-deal-if-necessary Brexit, which would see the UK adopt less favourable WTO trading terms after exiting the EU. Cable has support at 1.2691-93, and resistance at 1.2742-45.

    [USD, CHF]
    EUR-CHF extended to a 11-day high at 1.1211, reflective of unwinding in safe-haven positioning following U.S.-Mexico developments and the recent burgeoning in central bank easing expectations. The gain put some further space in from the 23-month low that was printed at 1.1119 earlier in the week. The SNB's Alternate Governing Board Member Moser said recently that in his view "if we had higher interest rates then we would have a stronger exchange rate", which something the central bank is ever eager to prevent. The SNB continues to bank on the combination of a negative deposit rate and the threat of ad hoc currency intervention to keep the CHF under control, while trying to limit the impact of the negative rates on the domestic economy with the help of macroprudential instruments. Moser said that the risks in the Swiss real estate sector remain bearable, although he admitted that in the current environment these could increase.

    [USD, CAD]
    USD-CAD has consolidated in the mid 1.3200s, above the 11-week low yesterday at 1.3243. The Canadian Dollar has managed to more than hold its own against the outperformance of U.S. currency over the last day, benefitting from the 2% rise in oil prices over the last week, and with the improvement in U.S.-Mexican relations boding well for the yet to be ratified North American trade agreement. USD-CAD dove sharply on Friday to an 11-week low at 1.3262 in what was the biggest dialy drop since February 22, and the biggest weekly drop since the last week of December, before extending further south yesterday, posting a three-month low at 1.3243. Sub-forecast U.S. jobs data juxtaposed to sub-forecast Canadian jobs data was bearish catalyst on Friday. We expect follow-through selling of USD-CAD in the days ahead. The pair has resistance at 1.3303-05.

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