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By XE Market Analysis June 28, 2019 7:20 am
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    XE Market Analysis: North America - Jun 28, 2019

    Jostling for position ahead of the Trump-Xi showstopper has mostly characterised trading so far today, while the Euro saw a rotation higher following some perkier-than-expected inflation readings out of the Eurozone. In equity markets, moderate losses were seen in Asian markets, while moderate gains were seen across European bourses. The Yen posted fractional gains against this backdrop, which saw USD-JPY reverse most of yesterday's advance in printing a low at 107.56, while EUR-JPY edged out a two-day low. AUD-JPY also traded softer. EUR-USD, meanwhile, lifted from the mid 1.1300s to the upper 1.1300s, though the market lacked the impetus to challenge the 1.1412 one-month seen earlier in the week. Warmer than expected Fresh inflation data and an unexpected rise in core Eurozone CPI reading for the flash June estimate, to 1.1% y/y from 0.8% y/y, stirred some demand for the common currency, though the figure still remains well in benign territory, as did headline Eurozone HICP, at 1.2% y/y. EUR-GBP posted a new near-six-month-high for a third consecutive day, this time at 0.8992. This is the eighth successive up week the cross has seen, the last seven of which have produced higher highs than the week prior. The bigger driver over most of this period has been Sterling underperformance. USD-CAD fell down for a fifth consecutive day in what is now the third weekly decline out of the last four weeks, today printing a new trend low (so far) at 1.3086. That is the lowest level seen since late January.

    [EUR, USD]
    EUR-USD lifted from the mid 1.1300s to the upper 1.1300s amid a rotation higher in the Euro, but the market lacked the impetus to launch a challenge of the 1.1412 one-month seen earlier in the week. An unexpected rise in core Eurozone CPI reading for the flash June estimate, to 1.1% y/y from 0.8% y/y, stirred some demand for the common currency, though the figure still remains well in benign territory, as did headline HICP, at 1.2% y/y. The pair has been gravitating to the 1.1350 area over the last couple of days after rotating lower on the Fed's walk-back of dovish guidance. Given the moderation in Fed tightening expectations, 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. The Trump-Xi showdown is schedule for tomorrow, which should curtail commitment in markets today.

    [USD, JPY]
    The Yen posted fractional gains amid a cautious sentiment in global markets ahead of tomorrow's Trump-Xi showstopper at the G20 gathering. This saw USD-JPY reverse most of yesterday's gains in printing a low at 107.56, while EUR-JPY edged out a two-day low. AUD-JPY was also softer, though by a lesser extent. 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]
    EUR-GBP has posted a new near-six-month-high for a third consecutive day, this time at 0.8992. This is the eighth successive up week the cross has seen, the last seven of which have produced higher highs than the week prior. The euro counts for about a 50% waiting in the pound's trade-weighted value, so gives a good indication of market sentiment of the UK currency, regardless of some recent euro outperformance, with sterling having declined in six of the last eight weeks against both the dollar and yen. Markets have been discounting the expected economic consequences of prolonged Brexit and political uncertainty in the UK, with the added prospect that the no-deal-Brexit-if-necessary Boris Johnson is the strong favourite/near certainty to become the new prime minister. The Brexit issue has gone largely dormant, but is sure to explode once the new PM picks up the reins (expected mid July). There is a group of parliamentary members are working on a plan to prevent a no-deal Brexit by withholding government funding, if necessary. This comes with Boris Johnson having made noises about circumventing parliament to achieve a no-deal Brexit. 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, and don't see much scope for this to reverse anytime soon. Cable has support at 1.2650-52, and resistance at 1.2749-50.

    [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 is down for a fifth consecutive day and what is now the third weekly decline out of the last four weeks, today printing a new trend low (so far) at 1.3086. That is the lowest level seen since late January. The new low reaffirms 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 1.3146-50.

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