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By XE Market Analysis October 20, 2017 8:09 am
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    XE Market Analysis: North America - Oct 20, 2017

    The dollar has rallied across the board, up 0.4% versus the euro and by 0.7% against the yen, following news that the U.S. Senate had passed a budget blueprint that will help push forward the Republican party's planned $1.5 tln tax cut. The news came after the close of Wall Street, and sparked a rally in U.S. equity index futures while lifting global bourses. USD-JPY rallied to a two-week high of 113.47, gaining over 60 pips from the pre-news levels. EUR-USD tumbled to a 1.1791 low from levels just above 1.1850. The relative underperformance of the yen, which is typical during bursts of risk-on sentiment in global markets, saw EUR-JPY and other yen crosses climb, as the dollar post gains versus the euro and most other currencies. Market participants will monitor the budget's passage in the House. The budget, if passed, will open the door to expanding the federal deficit by $1.5 tln over 10 years, which will pay for the tax cut. This won't be pleasing to fiscal conservatives in the House, and was the reason for Rand Paul to vote against it in the Senate vote, and while there may be more opposition from House Republicans, the desire for a political win has fostered a change in priorities. We advise buying the dollar.

    [EUR, USD]
    The euro has traded mixed today, losing ground to the dollar and gaining versus the yen. EUR-USD tumbled to a 1.1801 low, extending the dollar-buying driven decline from levels above 1.1850. The move was catalysed by news that U.S. Senate passed a budget blueprint that will help push forward the Republican party's planned $1.5 tln tax cut. Despite the decline in EUR-USD, the EUR-JPY cross still managed to lift as the yen underperformed, with the cross managing to post a four-week high at 133.96. Markets will now be focusing on the passage of the budget in the House, along with Trump's pending choice of who will take the helm of the Fed for the next term. The five candidates under consideration for the Fed job range from the dovish Yellen, the present chair of the central bank, to the decidedly hawkish Taylor. Trump is expected to announce his choice by November 3. EUR-USD has support at 1.1785-87.

    [USD, JPY]
    USD-JPY rallied to a two-week high of 113.47, gaining over 60 pips from the pre-news levels. The move was catalysed by new that the U.S. Senate had passed a budget blueprint that will help push forward the Republican party's planned $1.5 tln tax cut. The news came after the close of Wall Street, and sparked a rally in U.S. equity index futures while lifting global bourses. The relative underperformance of the yen, which is typical during bursts of risk-on sentiment in global markets, saw EUR-JPY and other yen crosses climb, as the dollar post gains versus the euro and most other currencies. We have been and continue to advocate a bullish view of USD-JPY, although on the proviso that geopolitical tensions don't flare up and cause a yen-supportive risk-off trade in global markets. Support is at 112.77-80.

    [GBP, USD]
    Cable clocked an 11-day low at 1.3088 before finding a footing and rising to around 1.3180. We had noted scope for a rebound today should the speculative market, which is running a net short exposure, cover positions ahead of the weekend. Positive remarks from EU diplomats about Brexit have helped foster the sterling up-move, too. Bigger picture, we retain a bearish view of the Queen's currency. There has been a palpable rise in the risks that the UK may leave the EU without a new trading deal having been made given the evident deadlock in negotiations, while there is also political risk in Britain, with the ruling Tory party in both a fragile and warring state.

    [USD, CHF]
    EUR-CHF has corrected some after logging a 33-month high at 1.1629, with the cross settling back around 1.1575. Former EUR-CHF resistance at 1.1488-90 proved a good support earlier in the week. We have been anticipating an eventual return to 1.2000, which is the former trading floor of the SNB's, though this assumes that political tensions (Catalonia in particular) don't worsen, as the franc tends to find demand amid news developments that might be threating to the political integrity of the Eurozone.

    [USD, CAD]
    USD-CAD rallied back above 1.2500 with the U.S. dollar encountering demand after the Senate passed a budget that marks a significant step for the Republicans $1.5 tln tax cut plan. We expect the overall bias will remain to the upside, with the Fed still seen on track to hike the Fed funds rate by 25 bp in December, and with BoC policymakers having actively dispelled any notion that it is on a committed tightening path. The BoC's quarterly business survey, released earlier in the week, showed economic activity to be remaining robust in a state of moderation following a strong performance over the summer period. USD-CAD has support at 1.2432.

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