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By XE Market Analysis October 7, 2019 7:18 am
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    XE Market Analysis: North America - Oct 07, 2019

    The dollar has been trading on a steady-to-firmer footing, seeing modest gains versus the euro and more pronounced 0.5% advance against the Australian and New Zealand dollars. The yen outperformed, albeit moderately so, which weighed on USD-JPY a little, while AUD-JPY saw losses of over 0..6%. Stock markets in Asia and Europe went back into sputtering mode after Bloomberg report cited Chinese officials saying that they are increasingly reluctant to agree to a broad trade deal. Data out of German added to the gloom, with manufacturing orders contracting by 0.6% m/m in August and the October Sentix investor confidence falling to its lowest levels since the dark days of 2009. The data elicited a dip in EUR-USD, which came within about 5 pips from Friday's low at 1.0957. Continued instability in Hong Kong and Brexit uncertainty remain on the worry list, while U.S.-North Korea denuclearization talks appear to have broken down. S&P 500 futures were showing a loss of 0.3% heading into the New York interbank open after the cash version of the index closed out on Wall Street on Friday with a 1.4% gain.

    [EUR, USD]
    EUR-USD has edged lower, drawing in Friday's low at 1.0957. More worrisome data came out of Germany, where manufacturing orders contracted by 0.6% m/m in August and the October Sentix investor confidence fell to its lowest levels since the dark days of 2009. Both the Eurozone and U.S. economies are experiencing economic slowing, though the former is clearly at a more advanced stage, and near to tipping into recession. EUR-USD has been in a clear bear trend since early 2018, descending from levels above 1.2500 over this time period. Last Monday's 28-month low at 1.0879 marked a reaffirmation of this trend.

    [USD, JPY]
    USD-JPY has settled in the upper 106.00s, near to levels seen ahead of Friday's U.S. jobs report. The not-as-bad data saw the pair run to a high of 107.13, though the move ran out of puff. S&P 500 futures were showing a loss of 0.3% heading into the New York interbank open after the cash version of the index closed out on Wall Street on Friday with a 1.4% gain. The good vibes of Friday also failed to transfer to Asian equity markets today, which continued a sputtering price action (note, Chinese markets are still closed, will reopen tomorrow). The main takeaway from the last week's data out of the world's biggest economy -- including the marked slowing evidenced by the September ISM reports for the manufacturing and services sectors, along with the weaker pay data element in the jobs report -- is that the growth is decelerating. The 50-year low in the jobless rate grabbed headlines, but joblessness is historically a laggard indicator with regard to the economic cycle. Whether or not the U.S. economy is recession bound remains to be seen, and may depend a lot on how trade talks go with China. Face-to-face meetings between top-level U.S. and Chinese officials will take place later this week. Discouragingly, Bloomberg cited Chinese officials saying that they increasingly reluctant to agree to a broad trade deal. Instability in Hong Kong and Brexit uncertainty are also on the worry list. Overall, we expect the directional bias of USD-JPY to remain to the downside, which assumes fresh signs of economic slowing in the major economies, including the U.S., and an underwhelming outcome in the upcoming round of U.S.-China trade talks.

    [GBP, USD]
    Cable has settled near 1.2300 and continues to trade with about a 14-15% discount in trade-weighted terms from levels prevailing ahead of the vote to leave the EU in June 2016. 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 last week found itself in the rare position of being biggest loser out of the main currencies. 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.The cross has since pulled back to the lower 1.0900s. Suspicions of SNB intervention abounded, which made 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 recent quarterly policy review, the SNB reaffirmed 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 is showing a 0.7% gain from week-ago levels and is up by 1.2% from month-ago levels. The recent near 20% plunge in oil prices (from high to low) drove a phase of underperformance in the Canadian currency, given the impact of big shifts in oil prices on Canada's terms of trade. Bigger picture, USD-CAD has been trending upwardly since the mid-July low at 1.3016. Bigger bigger picture, the pairing has been amid a sideways chop, ranging from 1.3016 on the downside to 1.3565 on the upside, since mid January. More of the same looks likely.

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