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By XE Market Analysis June 17, 2019 7:06 am
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    XE Market Analysis: North America - Jun 17, 2019

    Trading has been directionally unambitious so far today, with the Dollar consolidating a recent phase of outperformance against other currencies. Stock markets have been narrowly mixed in Europe and Asia, as have S&P 500 futures. The FOMC, BoJ, and BoE all meet this week and though none are expected to change rates, markets will be eager to gauge any shift in tone. The evolving Fed policy outlook has led the recent charge in expectations that major central banks will maintain their accommodative policy postures, if not suggest a more dovish stance, with the futures pricing in a cut as soon as July, thanks to rising tensions in the Middle Ease, elevated uncertainties over a U.S.-China trade deal, signs the tariffs are weighing on growth, and chronically low inflation. EUR-USD has been plying a narrow range in the low 1.1200s, holding within the range seen on Friday and consolidating above the low seen then at 1.1202, which followed above-forecast prints in U.S. retail sales and production data. USD-JPY managed to eke out a six-day high at 108.70 after a turn of yen selling. Cable has remained heavy, edging out a fresh three-week low at 1.2571. The Dollar has also been consolidating recent gains against the Australian and Canadian Dollars.

    [EUR, USD]
    EUR-USD has been plying a narrow range in the low 1.1200s, holding within the range seen on Friday and consolidating above the low seen then at 1.1202, which followed above-forecast prints in U.S. retail sales and production data. Fed easing expectations look to have plateaued (Fed funds futures now fully discounting a 25 bp rate cut by the July FOMC), while the Dollar has in recent sessions been lifted as geopolitical tensions generate demand for U.S. Treasuries, which are the highest yielding risk-free assets available. As for the Euro, rising pressure on the ECB to entertain a further easing in monetary policy has put a cap on the currency following a recent spate of advancement. ECB's Coeure hinted today that rate hikes and interest rate tiering may be on the agenda in the coming months, while his colleague De Cos is ready to act to give inflation a boost if necessary. For now, we anticipate EUR-USD's directional bias will remain to the downside, assuming trade and geopolitical tensions remain elevated. EUR-USD has resistance at 1.1260, and support at 1.1200-02.

    [USD, JPY]
    USD-JPY has settled lower after eking out a six-day high at 108.70 during the Tokyo session. This price action comes with there being little directional impulse in stock markets in Europe or Asia. S&P 500 futures have been trading on either side of no-change. Markets are anticipating major central banks to maintain their accommodative policy postures, if not suggest a more dovish stance. The Fed, BoJ, and BoE all meet this week and though none are expected to change rates, market participants will be eager to gauge any shift in tone. In Japan, the BoJ meets Wednesday-Thursday, and is widely expected to maintain unchanged policy, attached with more-stimulus-if-needed-down-the-road guidance. Governor Kuroda last week told Bloomberg that the central bank had further tools in its stimulus toolkit, though he said further accommodation was not needed at the present juncture. In data, Japan's May trade report (Wednesday) should see the prior JPY 56.8 bln surplus flip to a JPY 1,000 bln deficit. May national CPI (Friday) should see overall inflation fall to 0.6% y/y from 0.9%, while on a core basis, we expect a 0.5% y/y reading versus 0.9% in April. We don't anticipate either the BoJ of this week's data releases will have much directional bearing on the yen. U.S.-China trade tensions have taken a back seat ahead of next week's G20 gathering, although the lack of preparatory ministerial-level meetings before the summit suggests that the best that could be hoped for is cordiality between the two sides. If not, we would expect USD-JPY to resume a downward path, driven by safe-haven demand for the yen. The pair has resistance at 108.80-85.

    [GBP, USD]
    Cable has printed a fresh three-week low at 1.2571. A breach of the May-31 low at 1.2559, which is the lowest level seen since in over five months, would further provide reaffirmation of the bear trend. EUR-GBP, meanwhile, came within 1 pip of its Friday high at 0.8917, and looks of a disposition to challenge the five-month peak seen on June-11, at 0.8932. There is now data of note out of the UK until May inflation and retail sales reports, due Wednesday and Thursday, respectively. The Brexit process remains frozen as the the Conservative Party's leadership contest ensures. Boris Johnson remains the strong favourite, though there is an outside risk that his lead will be eroded as the sharp end of the contest, which will be dominated by laid-bare policy proposals and debates, draw nearer. Most candidates, like Boris, are advocating a hard, no-deal-if-necessary Brexit, which should keep a lid on the pound. We estimate that the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016. Cale has resistance at 1.2600-05.

    [USD, CHF]
    EUR-CHF dropped back to the 1.1200 area last week from a two-week high at 1.1264. The decline was driven by the Swiss Franc, which rallied in the wake of the SNB policy announcement last Thursday. There didn't appear to be a specific catalyst, and the SNB's message was in fact dovish, stating 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. The currency had weakened earlier last week as market participants eyed the policy decision, so the price action looks to have been a buy-the-rumour-sell-the-fact type of reversal. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. UR-CHF posted a 23-month low at 1.1119 earlier in the month. Assuming U.S.-led trade tensions continue, and assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a directionally downward bias. The SNB's -0.75% deposit rate and policy of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

    [USD, CAD]
    USD-CAD printed an 11-day high on Friday at 1.3422, putting in some more distance from the 12-week low earlier in the month at 1.3243. Softer oil prices, which are down by over 16% from levels seen a month ago, have imparted a downward spin on the Canadian currency, even though the improvement in U.S.-Mexican relations bodes well for the new yet-to-be-Congressionally-ratified North American trade agreement. USD-CAD has support 1.3350.

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