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By XE Market Analysis October 2, 2019 7:10 am
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    XE Market Analysis: North America - Oct 02, 2019

    A dollar has been trading mixed against a backdrop of global stock market declines. USD-JPY printed a six-day low at 107.55, extending the correction after the pair yesterday matched the two-month high seen in mid September at 108.47. EUR-USD, meanwhile, held steady after yesterday lifting out of the 28-month low at 1.0879 following the big miss in the U.S. manufacturing ISM report upped the U.S. economy heading-for-recession narrative. Cable, in contrast, came under pressure as Brexit comes to a head, with Prime Minister Johnson set to send Brussels his government's final proposals for a divorcing deal with few expecting much chance of progress on the seemingly intractable Irish border issue. The Swiss franc came under notable pressure, with some market participants speculating that the SNB has been intervening in EUR-CHF, which rallied by over 0.5%. AUD-USD posted a fresh 10-year low, at 0.6670, with the China-exposed antipodean currency faring poorly in the risk-off environment. NZD-USD also traded lower, though remained above the four-year low seen yesterday. The mood in global markets has veered to the pessimistic side of the scales. The dismal U.S. manufacturing data yesterday has been followed by weak auto sales data, a slump in the U.K. construction PMI, and growth warnings from Germany's leading institutes, which cut back their growth forecast.

    [EUR, USD]
    EUR-USD has found a footing after yesterday printing a 28-month low at 1.0879, with the pair since recouping above 1.0900. This comes with the U.S. economy reaching a potential inflection point, with yesterday's big miss in the U.S. manufacturing ISM report ratcheting up risk of recession. This sent Treasury yields down sharply as Wall Street tumbled, undermining the bearish case for EUR-USD. Any further signs that the U.S. economy is heading to a recession would likely spark a more pronounced downward rotation in the dollar, while the safe haven yen could become the long currency of choice in the event global stock markets shift from a sputtering price action to a discernable bear trend. This would make a EUR-JPY a better route to express euro bearishness. Friday's U.S. nonfarm payroll report is a major focus, while today's September ADP employment survey will be of interest. We look for a 145k increase in private payrolls, versus the previous 195k. On the euro side of the coin, preliminary September Eurozone HICP came benign, at 0.9% y/y and 1.0% y/y in the respective headline and core readings. There are lots of ECB policymakers still due to speak this week, which should a deliver a strong net dovish message.

    [USD, JPY]
    USD-JPY printed a six-day low at 107.55, extending the correction after the pair yesterday matched the two-month high seen in mid September at 108.47. A mixture of broader dollar weakness and broader yen strength was at play, with the former descending against most currencies following yesterday's U.S. manufacturing ISM shocker and the yen picking up safe haven demand as global stock markets turn ugly, fearing that the world's biggest economy is at a point of inflection with regard to recessionary risk. We expect further downside in USD-JPY and yen crosses. Any further signs that the U.S. economy is heading to a recession would likely spark a more pronounced downward rotation in the dollar, while the safe haven yen could become the long currency of choice in the event global stock markets shift from a sputtering price action to a discernable bear trend. Friday's U.S. nonfarm payroll report is a major focus, while today's September ADP employment survey will be of interest. We look for a 145k increase in private payrolls, versus the previous 195k.

    [GBP, USD]
    Sterling came under pressure, though has remained above yesterday's lows thus far. Brexit is finally coming to a head, with Prime Minister Johnson set to send Brussels his government's final proposals. He has already stated that if the EU does not agree to discuss them that he will refuse to negotiate further. Johnson has also continued to assert that the UK will leave the EU on October 31 without a deal if necessary, despite the new law (the Benn bill) that prevents this (which we presume is an empty threat, though there is speculation that he, or some of this more entrenched Brexiteer cabinet members, are still looking to take the UK out of the EU without a deal on a technicality). The EU is familiar with the outline of the proposals, and that they won't satisfy the need to keep the Irish border free flowing while maintaining the integrity of the single market. Bloomberg has cited EU sources saying that some member states favour yielding a little on the Irish backstop by making it time-limited, but the European Commission has been quick to dismiss this. Cable has pressed back under 1.2270 to return focus on yesterday's one-month low at 1.2205, although the bearish case for this pairing is weaker in the wake of yesterday's big miss in the U.S. manufacturing ISM report, which sent Treasury yields down sharply as Wall Street tumbled.

    [USD, CHF]
    EUR-CHF has found a toehold after about a week-long spell of underperformance, which culminated in a three-week high being printed last Wednesday at 1.0832. The declines followed the SNB's quarterly policy announcement last week, which will be frustrating to Swiss policymakers given their chronic concerns of the franc's chronic state of overvalue-ment (which regularly tops the Economist magazine's Big Mac purchasing parity comparison of currencies). The 26-month seen in early September at 1.0811 has so far remained untroubled, but still looks vulnerable.

    [USD, CAD]
    USD-CAD looks to be breaking to the downside after a period of orbiting the 1.3250 level. The pair yesterday posted a three-week closing low at 1.3212-13. A much weaker than expected U.S. manufacturing ISM reading for September has upped the heading-for-recession narrative and, in the case of the USD-CAD pairing, offset recent sharp declines in oil prices (front-month WTI crude futures having declined by over 15% from the peak seen in the immediate wake of the attack on Saudi crude facilities). A shift in the U.S. versus Canadian yield differential has warrented a concomitant drop in USD-CAD. More of the same looks likely, assuming U.S. data is set to err on the side of disappointment. As for Canadian data, July GDP (Tuesday) is expected to reveal a 0.1% gain (m/m, sa) after the 0.2% rise in June, consistent with slowing in Q3 GDP from the 3.7% clip revealed in the separate real Q2 measure. Canada's trade balance (Friday) is expected to show a narrowing in the deficit to -C$1.0 bln in August from -C$1.1 bln in July.

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