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By XE Market Analysis May 16, 2018 7:05 am
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    XE Market Analysis: North America - May 16, 2018

    The dollar firmness theme mutated into a specific EUR-USD weakness theme, with the pairing trading under the 1.1800 level for the first time since December while the dollar concurrent gave back some of the gains it saw yesterday versus the yen, Canadian dollar and other currencies. EUR-USD posted a five-month low at 1.1794. Euro underperformance also weighted on EUR-CHF, EUR-JPY and other crosses, linked to concerns about the Italy's political evolutions, which seen the yields of Eurozone peripheral sovereign gap higher relative to the Bund yield. USD-JPY has settled in the lower 110.0s after posting a 13-week high at 110.45 during the New York PM session yesterday.

    [EUR, USD]
    EUR-USD posted a five-month low at 1.1794. The latest down phase has been a mix of broader dollar firmness and a degree of euro underperformance linked to concerns about the Italy's political evolutions, which seen the yields of Eurozone peripheral sovereign gap higher relative to the Bund yield. As for dollar buying, this has been driven by a spike in U.S. Treasury yields. Although softer today, the 10-year T-note hit a seven-year high above 3.03% yesterday, while Fed funds futures were, as of the PM session on Wall Street yesterday, fully pricing in at 25 bp tightening at the June 12th-13th FOMC while discounting about 80% odds for another quarter point hike by September. EUR-USD has resistance at 1.1910-12, and trend support comes in at 1.1743-44.

    [USD, JPY]
    USD-JPY has settled in the lower 110.0s after posting a 13-week high at 110.45 during the New York PM session yesterday. The new high was largely a reflection of broad dollar buying, which has been concomitant with an ongoing spike in U.S. yields, with the 10-uear T-note yield ascending to seven-year high over 3.03%. Strong data out of the U.S. has also been the mix, including yesterday's retail sales and Empire State manufacturing releases, while today's preliminary Q1 GDP report out of Japan disappointed, at -0.6% q/q, with Q4 data revised to 0.6% q/q growth from 1.6% q/q growth. The Japanese data follows a Reuters survey (published on Monday) that found almost half of respondents expecting the BoJ to maintain ultra-accommodative monetary policy until 2020, which starkly contrasts Fed policy direction. We advise trend following for USD-JPY. Support is at 110.01-03, which encompasses former range highs.

    [GBP, USD]
    The pound has remained heavy against the dollar, though has remained above yesterday's four-and-a-half-month low at 1.3451 (as of the late London AM session). The new low made this the fifth consecutive week of declines, although downside momentum has been abating, with a rising 14-day RSI momentum indicator pointing to a possible flattening out in the bear trend (based on historical tendencies in price trends). The pound has also come off versus the euro yen, after rising against these currencies in recent sessions. A solid UK labour report, yesterday, helped give the pound a lift, though remarks by BoE Deputy Governor Broadbent in an interview yesterday, which have been getting a fresh airing today, weren't so upbeat and didn't give any signal regarding policy. Broadbent described the UK economy as being amidst a slowdown in growth and wages comparable to the late 19th century, when productivity gains from the steam era had peaked but the age of electricity had not yet started, with Broadbent likening steam power to digitization and electricity to (possibly) artificial intelligence. We have been calling for a 25 bp hike in the repo rate at the August MPC meeting, though we still take a bearish view of Cable given comparatively strong Fed tightening expectations. Cable has resistance is at 1.3545-50, and support at 1.3451-55.

    [USD, CHF]
    EUR-CHF has taken a sharp knock lower, dragging lower by fresh EUR-USD selling, which has generated euro supply. The cross posted a five-week low at 1.1826, making this the biggest intra-week decline that has been seen since early February. Given that EUR-CHF is a good proxy of the Swiss franc's trade weighted value, and given Swiss policymakers view of the currency has still being overvalued, the latest price action won't been pleasing to the SNB. SNB Vice Chairman Zurbruegg said earlier this week that the franc is still "highly valued" and that the central bank sees "no reason" to give up the negative interest rate or "our willingness to intervene in the foreign exchange market."

    [USD, CAD]
    USD-CAD lifted to a three-week high of 1.2914 yesterday amid the broader phase of U.S. dollar buying. A pullback in oil prices also helped, which may have headed off potential demand for the Canadian dollar. The gain extends the rebound from the three-week low that was seen last week at 1.2719. The disappointing April employment out of Canada, in data released on Friday, which weakened BoC tightening expectations, helped give the pair a prop. The Canadian calendar has a flurry of releases from today through to the end of the week, culminating in April CPI data on Friday.

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