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By XE Market Analysis May 30, 2019 7:13 am
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    XE Market Analysis: North America - May 30, 2019

    The Dollar, Yen and Swiss Franc traded moderately softer against most other currencies as stock markets steadied after the recent tilt lower. This helped EUR-USD find a toehold after three straight days of decline, with the pair holding in the lower-to-mid 1.1100s, above the one-week low seen yesterday at 1.1124. USD-JPY lifted to an eight-day high at 109.82 while the AUD-JPY cross managed to carve out an eight-day high. USD-CAD corrected back under 1.3500, down from the five-month high that was printed yesterday at 1.3546. Sterling traded on a relatively steady footing, though a bout of dollar demand saw Cable stab over 20 pips lower to a 1.2611 nadir before reverting to the 1.2625-30 area. The pair's five-month low seen last week at 1.2605 has remained unchallenged. It's gone quite on the Brexit front, at least in terms of substantive developments, with the Conservative Party presently seeing a lot fo jostling for position of candidates to replace Prime Minister May, who will step down at the end of next week (after President Trump's state visit). Assuming global markets remain plagued by bouts of risk-off positioning in the months ahead, we expect Dollar to hold up better than the Euro and Sterling, along with many other currencies outside the the Yen and Swiss Franc, given the attractiveness of U.S. Treasuries, being the highest yielding risk-free investment available. The risk of a no-deal Brexit scenario and concerns about the fiscal responsibility of the Italian populist government remain particular concerns for the Pound and Euro.

    [EUR, USD]
    EUR-USD has found a toehold after three straight days of decline, holding in the lower-to-mid 1.1100s, above the one-week low seen yesterday at 1.1124. A pause in risk aversion has seen the dollar come off the bid, though, assuming global markets remain plagued by bouts of risk-off positioning in the months ahead, we expect dollar to hold up better than the euro given the attractiveness of U.S. Treasuries, being the highest yielding risk-free investment available, and given the risk of a no-deal Brexit scenario and concerns about the fiscal responsibility of the Italian populist government. We view EUR-USD as remaining in a bear trend which has been evolving since early 2018. This was reaffirmed by the new two-year low that was printed last week at 1.1107. Resistance comes in at 1.1215-18.

    [USD, JPY]
    USD-JPY lifted to an eight-day high at 109.82 while the AUD-JPY cross managed to carve out an eight-day high, reflecting an unwinding in risk-off positioning, one expression of which has been a rotation lower in the Japanese currency. This comes with Wall Street having pared losses during the PM session yesterday and with S&P 500 futures showing modest gains, even though most Asian markets have remained nuder pressure today. Assuming that the U.S.-China trade war both deepens and persists, as is starting to look likely, this would likely set the Yen up for bouts of outperformance in the weeks and months ahead. USD-JPY has support at 109.05-08, and resistance at 109.57-60.

    [GBP, USD]
    Sterling is trading on a relatively steady footing, though a bout of dollar demand saw Cable stab over 20 pips lower to a 1.2611 nadir before reverting to the 1.2625-30 area. The pair's five-month low seen last week at 1.2605 has remained unchallenged. It's gone quite on the Brexit front, at least in terms of substantive developments, with the Conservative Party presently seeing a lot fo jostling for position of candidates to replace Prime Minister May, who will step down at the end of next week (after President Trump's state visit). The leadership contest will formerly commence on the week of June 10th. The new prime minister will almost certainly be either a person in favour of a hard, no-deal-if-necessary Brexit, or someone in favour only of a Brexit with a deal, such as Michael Gove, who asserts that leaving the EU without a deal on divorcing terms and outline for a future trading relationship would be irresponsible. Most likely it will be someone of the former type, Boris Johnson being the favourite, which should keep the pound's upside potential in check. Leaving the EU without a new deal would see the UK adopt WTO trading terms, which most economists attest would leave the UK on much less beneficial trading terms compared to current arrangements (member of the EU's single market and customs union, plus participation in the trade deals that the EU has with 50 countries around the world). We continue to advise trend following with regard to Cable. Support comes in at 1.2600-05, and resistance at 1.2715-18.

    [USD, CHF]
    EUR-CHF has steadied after dropping precipitously by the norms of this cross over the last two weeks in a move that had been driven by outperformance in the Franc as global asset markets sputtered amid the entrenching trade war between the U.S. and China. The cross printed a seven-week low last Thursday at 1.1206, since recouping to around the 1.1250 mark. The punitive -0.75% overnight deposit rate is evidently not sufficient to deter the Swiss currency from still being seen as a safe haven. The SNB's Alternate Governing Board Member Moser said recently that in his view "if we had higher interest rates then we would have a stronger exchange rate", which something the central bank is ever 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.

    [USD, CAD]
    USD-CAD posted a new five-month high at 1.3546 after breaking above recent range highs. The price action is a reaffirmation of the bull trend that the pair has been since late 2017. The U.S. currency's relative attractiveness as a safe haven juxtaposed to the Canadian economy's terms-of-trade exposure to lower oil prices (which have been in a declining trend for over a month) should keep USD-CAD on an upward directional bias. Support comes in at 1.3415-20.

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