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By XE Market Analysis May 15, 2019 7:23 am
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    XE Market Analysis: North America - May 15, 2019

    The London AM session went from risk-on to risk-off, the later phase of which saw the Yen and other safe havens rise while currencies and assets with high-beta performance characteristics came under pressure. A 16-year low in retail sales in China, alongside a moderation in industrial production data, helped rekindle risk aversion in global markets. S&P 500 futures went negative, giving up a near 0.5% gain, and were showing a 0.2% decline heading into the Wall Street open. The pan-Europe Stoxx 600 index, after opening higher, dropped to a 0.2% loss. The 10-year U.S. T-note yield declined 2.7 bp. Out of the main dollar pairs and associated cross rates the biggest mover was, not surprisingly, AUD-JPY, which fell over 0.5% in printing a four-month low at 75.56. EUR-JPY also posted a new four-month low, while USD-JPY tumbled to a two-day low at 109.27, returning focus to Monday's four-month low at 109.02. Elsewhere, EUR-USD maintained a narrow range in the lower 1.1200s, so far surviving several brief dips below the figure. Italy's deputy prime minister's remarks yesterday that the country would break EU budget rules on debt if necessary to spark employment inspired some negativity in market narratives about the Euro. Market participants appear to be taking stock of mollifying remarks from President Trump and expectations for further Chinese stimulus on the one hand, and the reality of the sharp increase in tariffing by the U.S. and China, along with the risk for a deepening trade war, on the other. A senior Trump administration source told Axios yesterday that the differences between the two sides are so great that in his view there won't be a resolution before the end of the year, while Beijing communications via editorials in state-backed media also suggest that China is digging in.

    [EUR, USD]
    EUR-USD has been maintaining a narrow range in the lower 1.1200s, so far surviving several brief dips below the figure. The euro has traded weaker against the yen and Swiss franc, with these currencies outperforming amid rekindling risk aversion in global markets. Italy's deputy prime minister's remarks yesterday that the country would break EU budget rules on debt if necessary to spark employment has inspired some negativity in market narratives about the euro. How the dollar performs during what we assume will be a new phase of heightened trade tensions between the U.S. and China will be a key determinant of EUR-USD's directional bias. If previous episodes of tensions over the last year are anything to go by, the U.S. currency may continue to firm against the euro, being apt to perform as a liquid safe haven currency during phases of risk-off positioning in global markets. Big picture, we still view EUR-USD as remaining in a bear trend which has been evolving since early 2018. The pair had been in a rebound phase over the last couple of weeks after posting trend lows in both March and April. Resistance comes in at 1.1264-65.

    [USD, JPY]
    The Yen picked renewed safe-haven demand as stock markets in Europe and U.S. equity index futures came under pressure. USD-JPY tumbled to a two-day low at 109.27, returning focus to Monday's four-month low at 109.02, while AUD-JPY and EUR-JPY both fell to new respective four-month lows. Market participants appear to be taking stock of mollifying remarks from President Trump and expectations for further Chinese stimulus on the one hand, and the reality of the sharp increase in tariffing by the U.S. and China, and risk for a deepening trade war, on the other. A senior Trump administration source told Axios yesterday that the differences between the two sides are so great that in his view there won't be a resolution before the end of the year. Beijing communications via editorials in state-backed media also suggest that China is digging in, blaming the trade war on "one person and his administration and asserting that the U.S. is misjudging China's "capability and willpower." As Axios highlighted, this is turning into a contest between President Trump, who faces an election next year, and president-for-life Xi. Trump's view is that a trade war will hurt China more than the U.S.

    [GBP, USD]
    Sterling has returned to a softening path, posting respective two-week and two-month lows against the dollar and euro. Cable's lows is at 1.2898, which extends the quite-steep decline from the early May peak at 1.3176, itself the loftiest point reached over the last six weeks. The pound failed to sustain gains seen after UK labour data yesterday, which showed the unemployment rate unexpectedly fell to 3.8% in March, the lowest rate seen since December 1974. However, average household income disappointed, with the bonus-included figure dipping to 3.2% y/y in the three months to March, down from 3.5% y/y in February. As we noted, too, more timely and forward looking PMI surveys for April highlighted a stagnation in the employment market, so we would advise caution in reading too much into the new cycle low in unemployment. We have been advising a bearish view of the pound. The unresolved Brexit mess, a month from the three-year anniversary of the vote to leave the EU, remains a negative given the impact of prolonged political uncertainty on business investment. The risk of a disorderly no-deal Brexit also remains a possibility. Regarding Brexit, Prime Minister May announced there would be another parliamentary vote on Brexit in early June. Labour said that it will vote against it unless the vote is on a cross-party deal, which at this juncture looks unlikely (the government and Labour remain in negotiations). May said that if Parliament fails to agree on a Brexit deal in June, then the choice will be between a no-deal Brexit or remaining in the EU. Cable has resistance at 1.2967-70, and support at 1.2904-05.

    [USD, CHF]
    EUR-CHF dove to a one-month at 1.1288 before finding a toehold and lifting back above 1.1300. This dive yesterday came amid renewed risk-off position in global markets as tensions between the U.S. and China on trade ratcheted higher, which rekindled the Franc's hitherto latent safe haven appeal, despite the SNB's -0.75% deposit rate. EUR-CHF has resistance at 1.1320-23.

    [USD, CAD]
    USD-CAD has continued to consolidate towards the upper reaches of the recent range, above 1.3450 after rebounding from the two-week low seen at 1.3388 last Friday following the bearish combo of soft U.S. April CPI data and forecast-beating strength in Canada's April employment report. Canada releases April CPI today. We expect CPI to grow 0.5% in April after the 0.7% surge in March, lifting the annual growth rate to 2.0% from 1.9% in March. we expected a more benign picture to show in core CPI data, which had been surprisingly firm in March, boosted by temporary factors. We continue to expect USD-CAD to revisit, and break above, its trend peak at 1.3521. Support comes in at 1.3400-05.

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