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By XE Market Analysis May 16, 2019 7:24 am
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    XE Market Analysis: North America - May 16, 2019

    The Dollar has been trading mixed, losing ground to the Canadian Dollar, which has outperformed amid fresh gains in oil prices on Middle East tensions, while posting fresh trend highs against the Australian Dollar following an unexpected rise in the Australian jobless rate, and the Pound, which continued on a Brexit-related losing streak. EUR-USD, meanwhile, has been idling near 1.1200, above the one-week low seen yesterday at 1.1178, and USD-JPY has been plying a narrow range near 109.50, above the three-month low seen on Monday at 109.02 and unaffected by a Reuters report suggesting that the Japanese government is likely to downwardly revise its economic assessment. Cable printed a three-month low at 1.2820. The pound also posted a three-month versus the Euro, and declined against other currencies. USD-CAD posted a six-day low at 1.3401. The U.S.-China trade spate ratcheted higher after the Trump administration blacklisted China's Huawei, adding it and 70 affiliates to its "Entity List," which will bar the company from acquiring components and technology from U.S. firms without government approval. Beijing fired back, with the Commerce Ministry stating that China will be forced to retaliate "if the US is headstrong on trade" while asserting that the trade dispute's impact on China's economy "is completely manageable." Despite this, European stock markets rose while S&P 500 futures posted a 0.3% gain, reversing out of a 0.2% loss. This followed a mixed session in Asia.

    [EUR, USD]
    EUR-USD has been idling near 1.1200, above the one-week low seen yesterday at 1.1178. 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]
    USD-JPY has been plying a narrow range near 109.50, above the three-month low seen on Monday at 109.02. The Japanese government is set on downwardly revising its economic assessment, according to a Reuters report, citing an unnamed source, although to little impact on the Yen. We anticipate that the Japanese currency will be apt to appreciate in bouts over the coming months, assuming that the U.S.-led trade war will remain intense. While President Trump is clearly wanting to placate investor concerns about its trade war as much as possible, stressing that dialogue remains open with China, with the U.S. economy strong and over a year to go before the 2020 presidential election, we anticipate the Trump administration will continue to play hardball with China on trade. This in turn suggests markets will remain on a volatile path. USD-JPY has support at 109.02-05, and resistance at 110.05-08.

    [GBP, USD]
    Sterling has resumed its losing streak, posting fresh three-month lows against both the dollar and euro. Cable's low is 1.2821 in what is now the fifth consecutive daily decline and the eighth down day out of the last nine trading days. The pound is showing an average decline of 1.5% versus the dollar, euro and yen from week-ago levels, though is still up by an average 1.3% against these currencies on the year-to-date. Brexit is to blame, although there have been no substantive new developments. UK Prime Minister May yesterday announced there would be another parliamentary vote on Brexit in early June, to which Labour and other opposition parties promptly said that they will vote it down unless, in the case of Labour, the vote is on a cross-party deal, which at this juncture looks unlikely (the government and Labour remain in negotiations). May, herself under pressure to step down, 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. This comes with the newly established Brexit Party, which favours a no-deal exit from the EU, running high in the polls. This has rattled markets somewhat. EU parliamentary elections on May 23 will be viewed by markets a proxy vote on a second Brexit referendum, if there is to be one (which is looking increasingly likely). The prolonged political uncertainty, meanwhile, has been having an erosive impact on the UK economy, particularly in business investment. British Steel, for instance, today asked the government for a loan to cover "Brexit-related issues." We have been advising trend following Cable. Resistance is at 1.2875-78.

    [USD, CHF]
    EUR-CHF, in this week posting a five-week low at 1.1264, has corrected over half of the gains seen during the pronounced rally that was seen in April. Concerns about Eurozone growth and political situation have been exerting an influence on the Euro and EUR-CHF cross. Italy's deputy prime minister this week said the country would break EU budget rules on debt if necessary to spark employment. The SNB's Alternate Governing Board Member Moser said during a panel discussion yesterday that in his view "if we had higher interest rates then we would have a stronger exchange rate", something the central bank is eager to prevent. The SNB continues to bank on the combination of a negative deposit rate and the threat of ad hoc currency intervention to keep the CHF under control, while trying to limit the impact of the negative rates on the domestic economy with the help of macroprudential instruments. Moser said so far the risks in the Swiss real estate sector remain bearable, although he admitted that in the current environment these could increase. EUR-CHF has resistance at 1.1320-23.

    [USD, CAD]
    USD-CAD has ebbed from the upper 1.3400s to the lower 1.3400s over the last day. The move has been concomitant with a rise in oil prices and stabilisation in equity markets following placating remarks from the Trump administration on the trade front. Overall, we expect USD-CAD to remain upwardly biased, which the pair has been since October 2017, anticipating a revisit, and break above, the recent trend peak at 1.3521. Support comes in at 1.3400-05.

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