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By XE Market Analysis May 23, 2018 9:14 am
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    XE Market Analysis: North America - May 23, 2018

    A risk-off theme propelled the yen higher and, to a lesser extent, the dollar, which posted gains against most currencies outside the case versus the Japanese unit. The narrow trade-weighted USD index (DXY) has gained 0.4%, though has remained a little short of the five-month high that was seen on Monday at 94.06. EUR-USD traded below 1.1700 for the first time since last November, pegging a low at 1.1698. The biggest movers were the yen crosses, with EUR-JPY, AUD-JPY and GBP-JPY showing losses of over 1.5% at their respective lows. USD-JPY lost just over 1% in setting an eight-session low at 109.55, extending the correction from Monday's four-month high at 111.39. Tumbling global stock markets and an associated flight to safety underpinned the Japanese currency. There is a cocktail of geopolitical concerns influencing investor sentiment: Italian yields are spiking again, the Turkish lire dove to fresh record lows, and U.S. President Trump saying, yesterday, that that there was a "very substantial chance" of the North Korean summit being delayed. Pending U.S. sanctions on Iranian exports, and rising tensions between Europe and the U.S. are also on the worry list.

    [EUR, USD]
    EUR-USD traded below 1.1700 for the first time since last November, pegging a low at 1.1698. A generally firmer dollar coupled with a pronounced drop in EUR-JPY drove the latest price turn, though the euro has been weakening against other currencies in addition to the dollar and yen, most notably the Swiss franc. Italy remains in the spotlight amid concerns about the policy proposals of the anti-establishment, Eurosceptic coalition government. We remain bearish, expecting, aside from the revival in Eurozone existential risks, the rising U.S. yield advantage relative to Bunds to sustain. EUR-USD resistance comes in at 1.1808-10.

    [USD, JPY]
    USD-JPY and yen crosses racked up sharp losses, led by EUR-JPY and AUD-JPY, which were down by 1.6% apiece, as of the late London AM session, and GBP-JPY, which was off by 1.7%. USD-JPY was above 10 pips above its lows but is down by 1.1% on the day. The pair logged an eight-session low at 109.55, extending the correction from Monday's four-month high at 111.39. Tumbling global stock markets and an associated flight to safety underpinned the Japanese yen, despite what would otherwise be a strong fundamental case (the BoJ's ZIR policy and pegging of the 10-year JGB yield to near 0%) to short the yen. There is a cocktail of geopolitical concerns influencing investor sentiment. Italian yields are spiking again, the Turkish lire dove to fresh record lows, and U.S. President Trump saying, yesterday, that that there was a "very substantial chance" of the North Korean summit being delayed. Pending U.S. sanctions on Iranian exports, and rising tensions between Europe and the U.S. are also on the worry list. USD-JPY has breached below the 20- and 200-day moving averages today, and would need to close below the latter, at 109.86, to strengthen the bearish signal.

    [GBP, USD]
    The pound took a beating following the UK CPI miss, and was, as of the late London AM session, showing a 0.6% decline on the day versus the dollar and an outsized 1.8% loss against the yen, which has outperformed on a safe haven bid amid souring risk appetite in global markets. The pound was fractionally lower against the euro. Cable clocked a fresh five-month low at 1.3347, while GBP-JPY posted an 11-week low at 146.28. The UK April headline CPI unexpectedly ebbed to 2.4% from 2.5% y/y in March, and the core CPI rate also came in a tad under at 2.1% y/y, down from 2.3% y/y in the month prior. The data can be downplayed to a degree, as the late timing of the Easter holiday relative to last year has caused some distortion, while rising oil prices, if sustained (which looks likely), can also be expected to exert upside influence on inflation rates in the months ahead. It can also seen that concurrent dollar and yen strength exaggerated the picture of a weakening pound, which in fact held up much better versus the euro and other currencies.

    [USD, CHF]
    EUR-CHF posted an 11-week low at 1.1600. The cross is down by some 1.7% over the last week, which is the biggest movement over this period out of the dollar pairings and cross rates that we keep tabs on, declining for what is now an eighth consecutive session. The driving dynamic has been a souring sentiment towards the euro on concerns about the policies of the newly forming anti-establishment and Eurosceptic coalition government in Italy. EUR-CHF is down by 3.2% from the 41-month that was printed a month ago at 1.2005, which was the culmination of a 10-month rally phase, and which in turn was a reflection of what had been -- before recently -- a sense of abating existential risks that the Eurozone was facing. Now things look to be trending back in the other direction. Yesterday's breach and close below the 200-day moving average, presently at 1.1693, was, for technical analysts, a significant bearish signal. Trend resistance is at 1.1722-24.

    [USD, CAD]
    USD-CAD has flipped higher over the last day, posting a two-day peak at 1.2971. This maintains a choppy, broadly sideways range that's been persisting for a month now. The low over this period has been 1.2729 and the high 1.2997. Generally U.S. dollar firmness has been met by Loonie-supportive higher oil prices, which has been causing volatility in USD-CAD but little net directional bias. We expect more of the same for now.

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