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By XE Market Analysis June 27, 2019 7:19 am
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    XE Market Analysis: North America - Jun 27, 2019

    The Yen dipped and then rebounded some as risk appetite in global stock markets went from risk-on, which dominated in Asia today, before turning risk-off during the European AM session, where market narratives become more circumspect about the prospects for meaningful progress between the U.S. and China at the upcoming G20 summit, which seems entirely justifiable given the recent history for disappointment. USD-JPY fell back to levels around 107.80 after posting an eight-day high at 108.16 during the Tokyo session. AUD-JPY, which had been showing a 0.5% gain at its highs, also fell back. The pan-Europe Stoxx 600 equity index was showing a 0.2% decline as of the early European PM session, while S&P 500 futures was showing a 0.2% gain, paring gains after showing a near 0.5% gain at the overnight session highs. EUR-USD remain in a narrow range in the mid-to-upper 1.1300s, holding the three-month high seen earlier in the week at 1.1412. The Euro saw only a brief dip on weak Eurozone confidence data, with the headline sentiment figure falling to 103.3 in June from 105.2 in the previous month, undershooting the median forecast for 104.6. Sterling picked up demands on news that a group of parliamentary members in the UK are working on a plan to prevent a no-deal Brexit by withholding government funding. Cable lifted to a two-day high of 1.2724, which is about 50 pips on the intraday low. EUR-GBP dipped under 0.8950, putting in some space from the five-month high seen yesterday at 0.8976.

    [EUR, USD]
    The Euro dipped on weak Eurozone confidence data, with the headline sentiment figure falling to 103.3 in June from 105.2 in the previous month, undershooting the median forecast for 104.6. EUR-USD ebbed under 1.1370, though the overall range has remained relatively narrow. The pair has been gravitating to the 1.1350 area for over a day after rotating lower on the Fed's walk back of its dovish guidance. The three-month peak seen Tuesday at 1.1412 has remained unchallenged. Given the moderation in Fed tightening expectations, and with tomorrow's June Eurozone inflation data expected to remain on the benign side, there looks to be limited scope for further sustained EUR-USD gains for now. The dollar also has potential to revert as a safe-haven currency should the geopolitical backdrop deteriorate, which is a clear risk (re U.S. vs Iran and U.S. vs China). 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]
    The Yen continued to weaken as forex and global stock markets opted for risk-on positioning ahead of the G20 summit, betting for some progress between the U.S. and China despite justifiable reasons to be wary, given the recent history for disappointment. AUD-JPY has been the biggest mover out of the main dollar pairings and associated cross rates, rising about 0.5% in printing a 16-day high at 75.62. USD-JPY posted an eight-day high at 108.16. This price action came as Chinese markets led broader gains across Asian stock markets, which propelled the MSCI Asia-Pacific index up by 0.6%, while S&P 500 futures were showing a gain of nearly 0.5% at the highs. 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.

    [GBP, USD]
    Sterling has found a toehold after posting a five-month low against the Euro late yesterday while printing a four-day low against the dollar. The price action caps a multi-week phase of underperformance as markets discounted the expected economic consequences of the prolonged Brexit and political uncertainty in the UK. Reserve and overlay managers remain underweight of the UK currency as they await concrete developments on the Brexit front. BoE Governor Carney remarked during parliamentary testimony yesterday that market expectations for a no-deal Brexit scenario have risen by a "notable" degree, while his colleague Saunders said that the Brexit deadlines, as seen with the original March-29 one and the new October-31 one, produces an incentive for businesses and households to defer spending. The BoE last week trimmed its Q2 GDP growth estimate to 0.0% q/q from 0.2%. 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.

    [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 been in a consolidative mood after yesterday carving out a four-month low at 1.3107, today settling fractionally higher, around 1.3130-35. Oil prices have also come off highs, after rallying strongly yesterday. The new low reaffirmed the bear tend that's been unfolding since early May. We advise trend following, anticipating further downside progress on the assumption 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 1.3205-08.

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