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By XE Market Analysis October 4, 2019 8:13 am
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    XE Market Analysis: North America - Oct 04, 2019

    The dollar majors have hunkered down in narrow ranges ahead of the release of the September U.S. non-farm payrolls report, which is being looked upon as having potential to mark an inflection point in the course of world's biggest economy following a slew of recessionary-portending data releases. EUR-USD has ebbed back to the mid-to-upper 1.0900s, below yesterday's 10-day peak at 1.0999. While the Eurozone economy appears to be heading for recession, the bearish case for EUR-USD has for now been put on ice, with the U.S. economy starting to look much less exceptional in terms of growth performance. USD-JPY has settled around 106.75-85, above the one-month low seen yesterday at 106.48. The Japanese currency is registering as the strongest currency out of the main currencies from week-ago levels, and was, as of the late London AM session, showing just over a 1% gain versus the dollar over this period, a 1.6% rise against the Canadian dollar (which has been afflicted by a 6%-odd tumble in oil prices), and a 1.5% gain in the case versus the Swiss franc (where SNB buying intervention in EUR-CHF has been suspected). Any unexpected weakness in U.S. jobs would likely send the dollar to new lows, and the yen to new highs, concomitantly with Treasury yield declines and renewed stock market selling. In this scenario, commodity and developing-economy currencies would also underperform.

    [EUR, USD]
    EUR-USD has ebbed back to the mid-to-upper 1.0900s, below yesterday's 10-day peak at 1.0999. While the Eurozone economy appears to be heading for recession, the bearish case for EUR-USD has, for now, been put on ice, with the U.S. economy starting to look much less exceptional in terms of growth performance. A sub-forecast U.S. employment report today, which is the clear risk, would fore many be greeted as marking an inflection point of the world's number one economy. This should keep the dollar on a back foot, though any prolonged period of risk aversion in global markets would likely generate demand for U.S. Treasuries, being the largest risk-free asset market in the world, which in turn could give the dollar an underpinning at such time any erosion in Treasuries yield advantage has slackened out.

    [USD, JPY]
    USD-JPY has settled around 106.75-85, above the one-month low seen yesterday at 106.48. The Japanese currency is registering as the strongest currency out of the main currencies from week-ago levels, presently showing just over a 1% gain versus the dollar, a 1.6% rise against the Canadian dollar (which has been afflicted by a 6%-odd tumble in oil prices), and a 1.8% fall in the case versus the Swiss franc (where SNB buying intervention in EUR-CHF has been suspected). Any unexpected weakness in U.S. jobs would likely send the dollar to new lows, and the yen to new highs, concomitantly with Treasury yield declines and renewed stock market selling. In this scenario, commodity and developing-economy currencies would also underperform.

    [GBP, USD]
    Cable has settled around 1.2330-35 after correcting from yesterday's peak at 1.2413. A cool response from the EU to Prime Minister Johnson's Brexit proposals have damped the mood, indicating that ideas for the Irish border fall short of what is needed to strike a deal, unless concessions are made. Brussels is particularly concerned about the part that gives Stormont (Northern Ireland's Assembly) the ability to vote on the arrangement every four years without provisioning what would happen in the event it voted against it. The leader of the principal opposition, Jeremy Corbyn, is also taking a strong line against Johnson's plan. As things stands, it doesn't look likely that a deal will be reached, though we'll have to seen how negotiations pan out. Time is short, with only a week of negotiations left until the Queen's speech on October 14th and the EU's summit on the 17th. It's looking likely that Brexit will be delayed until January 31 (which would be triggered by law if no deal is made by October 19th). A general election will be staged most likely in late November or early December. In the event that Johnson's Conservative Party won (and judging by polling, and given the UK's first past the post electoral system, they are favourites) then the same intractable Irish border problem will be faced all over again -- but this time, with a majority in Parliament, Johnson would be able to take the UK out of the EU without a deal.

    [USD, CHF]
    The Swiss franc has found itself in the rare position of being biggest loser out of the main currencies this week, registering a 1.8% decline against the yen, the strongest currency, from week-ago levels. EUR-CHF yesterday printed a two-week high at 1.0979, extending a rebound from the 27-month low seen in early September at 1.0811. Suspicions of SNB intervention abound, which makes sense from a tactical perspective, with the central bank having stood aside when then cross was downward trending amid broader euro underperformance before stepping in when EUR-USD was on the ascent. At its quarterly policy review earlier in the month, the SNB repeated its long held view that the franc remains "highly valued", while highlighting fragile markets and affirming the commitment to intervene in currency markets if needed. The franc regularly tops the Economist magazine's Big Mac purchasing parity comparison of currencies as being the most overvalued currency.

    [USD, CAD]
    USD-CAD rallied sharply this week as the Canadian dollar become afflicted by the 6%-off tumble in oil prices this week, which compounded the steep losses that were seen in the prior week. This has offset a narrowing in the Greenback's yield advantage over the Loonie. The pair logged a one-month high yesterday at 1.3348. The high seen on September 3, at 1.3382, which is a 15-week peak, provides an upside focal point. Any unexpected weakness in the U.S. jobs report today, which is the clear risk, would likely catalyse a correction in USD-CAD at the initial blow, though it would also send oil prices lower, especially with the weakening demand outlook dominating in crude market narratives presently, which would in turn curtail demand for the Canadian dollar.

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