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By XE Market Analysis June 26, 2019 7:47 am
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    XE Market Analysis: North America - Jun 26, 2019

    The Dollar has been trading mixed, holding steady against the Euro and Sterling, for instance, while rising about 0.5% against a generally weak Yen, which saw more of its safe-haven premium unwind as stock markets rallied at the prompt of U.S. Treasury Secretary Mnuchin's assertion that a trade deal with China is 90% complete. USD-JPY printed a six-day high at 107.72, extending the rebound from yesterday's near six-month low at 106.77. The biggest gainers have been the Dollar bloc currencies, with NZD-USD and AUD-USD gaining over 0.5%, with the latter making a 17-day high at 0.6994, while USD-CAD posted a fresh four-month low at 1.3142. The Canadian Dollar was supported in part by a 2%-odd surge in oil prices are weekly API data showed a 7.5 mln barrel rise in U.S. crude inventories in the latest reporting week. The biggest mover out of the main Dollar pairings and associated crosses rates was NZD-JPY, which rallied by over 1.1%. EUR-USD, meanwhile, settled to narrow range trading in the mid 1.1300s, down from the three-month peak seen yesterday at 1.1412 following Fed Bullard's walk back of dovish guidance.

    [EUR, USD]
    EUR-USD has settled to narrow range trading in the mid 1.1300s, down from the three-month peak seen yesterday at 1.1412. Fed Bullard, although a dove by reputation, said that a 50 bp rate cut in July would be "overdone," which sparked a reassessment of Fed easing expectations in markets, pushing Treasury yields lower, lifting the dollar, while knocking Wall Street lower. For now, dynamics in yield differentials looks likely to remain the dominant factor driving directional impulses, though the dollar still has potential to revert as a safe-haven currency should the geopolitical backdrop deteriorate, which is a risk (re U.S. vs Iran and U.S. vs China). Another potential, indirect, support for the dollar against the euro is the counterbalance of expectations for ECB easing, although with Bund yields having long since gone negative there is greater scope for Treasury yields to narrow the gap further than for Bund yields to drive a further widening. Bigger picture, EUR-USD has been in a bear trend since early 2018, though downside momentum has abated markedly in recent months, with the pairing looking to have found a rough equilibrium. Support comes in at 1.1344-47.

    [USD, JPY]
    USD-JPY extended to a two-day peak of 107.7, driven by the Fed's tempering of market expectations for aggressive rate cuts. Assuming that the U.S and China continue to struggle to find a resolution, and assuming U.S.-Iran tensions continue to simmer, we would expect USD-JPY, and more especially AUD-JPY, to return to a downward trajectory. Last week's five-month low at 73.92 provides a downside waypoint with regard to AUD-JPY.

    [GBP, USD]
    Cable has racked up three consecutive lower lows, earlier printing a three-session low at 1.2662. This extends the correction from the one-month high at 1.2784. Much of the recent chop has been driven by broader swings in the dollar, which weakened on last week's FOMC more-dovish-than-expected guidance and rebounded some on Bullard's walk back of market expectations for a 50 bp rate cut in July. Fed fund futures are pricing in about 20% odds for a 50 bp move next month, down from about 40% odds prior to Bullard's remarks. Sterling in trade-weighted terms has remained overall soft, though managing to find a tentative footing over the last week after a multi-week phase of underperformance as markets discounted the expected economic consequences of the prolonged Brexit and political uncertainty in the UK. The BoE last week trimmed its Q2 GDP growth estimate to 0.0% q/q from 0.2% while stating that inflation remains well anchored, although still retaining guidance for gradual tightening over the three-year forecast horizon (which caveated on the assumption a smooth and orderly Brexit process). We estimate that sterling has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and don't see much scope of this reversing while the no-deal-Brexit-if-necessary Boris Johnson continues to look the prime minister in waiting. Cable has resistance at 1.2710-12.

    [USD, CHF]
    EUR-CHF has found a footing after coming under signifiant pressure last week, in the wake of ECB President Draghi's eyebrow raising dovish shift, which has been the most notable of a growing chorus of dovish voices on the central bank's governing council. The cross printed a 23-month low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will doubtlessly 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 this 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 has come under some pressure amid a 2%-plus surge in oil prices today, which has been a buying cue for the Canadian Dollar. This has offset the Fed's walk back of easing expectations in markets, which has otherwise been supporting the U.S. buck. USD-CAD has dropped back towards last week's four-month low at 1.3151 from the upper 1.3100s. A new trend low would reaffirm the bear tend that's been unfolding since early May. We advise trend following, anticipating further downside progress, assuming that both the Fed remains on its overall dovish course and that U.S.-Iran tensions remain elevated, which should in turn keep oil prices underpinned. USD-CAD has resistance at 1.3240-45.

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