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By XE Market Analysis June 25, 2018 6:55 am
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    XE Market Analysis: North America - Jun 25, 2018

    A firmer yen amid a risk-off backdrop has been the dominant theme so far today as concerns about a worsening trade war plug at investors' anxieties. News, announced on Sunday, that the PBoC trimmed banks' reserve ratio requirement had limited impact, having been widely anticipated, and early gains in Chinese equity markets gave way to selling, which left the Shanghai Composite nursing a 1.04% loss at the close. The Nikkei 225 finished 0.7% for the worse, while the pan-Europe Stoxx 600 was showing a 1.1% decline as of the early PM session and S&P 500 futures were off by 0.7%, setting up Wall Street for a gap lower at the open. USD-JPY, after meeting a hefty wave of selling following a bout of demand at the Tokyo fixing, pulled back from just shy of 109.90 to a two-week low of 109.37, which was seen just ahead of the London interbank open. The biggest mover out of the main currencies today has been the AUD-JPY cross, which was showing a 0.7% decline, as of the early European PM session, although up from intraday lows. EUR-USD maintained a choppy range, largely unaffected by sub-forecast Ifo survey data out of Germany. The pair has so far remained with Friday's 1.1608 - 1.1675 range. The dollar posted gains versus the dollar bloc and most emerging currencies.

    [EUR, USD]
    EUR-USD has continued to hold a choppy range, largely unaffected by sub-forecast Ifo survey data out of Germany. The pair has so far remained with Friday's 1.1608 - 1.1675 range. The dollar, after generally firming the Tokyo session, has come off from intraday highs during the London AM session. The pair's high on Friday was the loftiest level seen since June 14, and followed above-forecast composite Eurozone PMI survey reading in preliminary June data. While the pair's two-month downtrend has been on pause in recent weeks, we expect that the balance of risk remains skewed to the downside. Trade tensions are likely to worsen, which recent price patterns suggest will benefit the dollar more than the euro. The Trump administration and its global counterparts are locked in their respective positions with little scope for negotiated resolution at this juncture. At the same time the new, fundamentally Eurosceptic Italian government has ongoing potential to rock the euro boat. The relative monetary policy paths of the Fed and ECB also favours the dollar over the euro, although this has already been priced in to some degree. EUR-USD has resistance 1.1675.

    [USD, JPY]
    The yen traded firmer with stock markets in Europe and Asia going bearish again on concerns about a worsening trade war. USD-JPY, after meeting a hefty wave of selling following a bout of demand at the Tokyo fixing, pulled back from just shy of 109.90 to a two-week low of 109.37, which was seen just ahead of the London interbank open. The biggest mover out of the main currencies today has been the AUD-JPY cross, which was showing a 0.7% decline, as of the early European PM session, although up from intraday lows. News, announced on Sunday, that the PBoC trimmed banks' reserve ratio requirement had been widely anticipated, and early gains in Chinese equity markets gave way to selling, which left the Shanghai Composite nursing a 1.04% loss at the close. The Nikkei 225 finished 0.7% for the worse. With the trade war taking root with little on the horizon to suggest there is much scope for a negotiated resolution, we expect a concomitant theme of market volatility, which should in turn maintain demand for the yen as a currency safe haven.

    [GBP, USD]
    The pound has established a higher trading range in the wake of yesterday's BoE announcement and minutes. Cable has settled in the lower-to-mid 1.32s after gained over two big figures in making a high of 1.3315. An increased rank of three MPC members calling for a 25 bp hike in the repo rate boosted both UK yields and the pound. Although still outnumbered to the tune of six, the dissenters have put a rate hike as soon as November back on the map. MPC member Ramsden, while voting for no change, has make clear in an media interview earlier in the month that he is a hawk in waiting. The minutes showed that most members are overlooking recent economic soft patch. The BoE made clear in its May Inflation Report that declining spare capacity and low productivity growth meant that gradual and measured monetary tightening will be warranted. We see Cable as more likely to form a range in the lower 1.30s than to commence a sustained rally.

    [USD, CHF]
    EUR-CHF has settled back above 1.1500 after printing a three-week low at 1.1487 earlier in the week. The cross was pressured from levels above 1.1600 in the wake of the ECB's dovish guidance signal of last Thursday. EUR-CHF is now about midway levels of the range that's been seen over the last three weeks. The ECB's policy stance should ensure that the SNB remains resolutely committed to its ultra-accommodative monetary policy setting in an attempt to ward off, or at least limit, franc gains against the euro.

    [USD, CAD]
    USD-CAD has settled lower after surging on Friday following the release of much weaker than expected retail sales and cooler than anticipated CPI data out of Canada. Friday's 4%-plus surge in oil prices help generate some demand-from-lows for the Canadian dollar. USD-CAD posted a one-year high of 1.3384 and has subsequently settled in the mid-to-upper 1.3200s. Support comes in at 1.3227-30. In Canada this week, BoC events dominate the docket this week, including a speech by Governor Poloz (Wednesday), which will be the final outing for a BoC official ahead of the July 11 rate announcement. An economy running near potential, 2% CPI and a 40-year low jobless rate are consistent with the Bank delivering on the signals from the May announcement and progress report that pointed to a rate hike. But recent data has undershot expectations. We still expect a 25bp hike next month, though with a weakened conviction. Another rate hike is pencilled in this year (we expect October) but uncertainty over NAFTA further clouds the policy outlook past July. Overall, we retain a bullish view of USD-CAD.

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