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By XE Market Analysis September 7, 2018 7:05 am
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    XE Market Analysis: North America - Sep 07, 2018

    The Dollar is at near net unchanged levels heading into the New York interbank open, while the Pound is up over 0.5% versus the U.S. currency and the Australian dollar down by almost 0.5%. The UK's currency was lifted after EU's chief Brexit negotiator Barnier said that the EU is "open to discussing other backstops" while the Aussie underperformed due to Australia's exposure to China, which looks at imminent risk of being hit by U.S. tariff hikes on another $200 bln worth of its exports. Cable logged a one-week high at 1.3038 while AUD-USD hit a 31-month low at 0.7137, subsequently lifting back above 0.7150. EUR-USD, meanwhile, held a narrow range in the low 1.1600s as markets anticipate today's release of the August U.S. jobs report (we're forecasting a 210k increase in employment, with a dip in the unemployment rate to 3.8%, and a 0.2% increase in earnings). USD-JPY logged a low at 110.38 before recouping toward 111.0 amid position trimming into the U.S. jobs report, while AUD-JPY fell by over 0.5% on route to posting fresh 22-month lows. Emerging market currencies are holding steady for a second day, and some of the most recently shaken have managed something of a rebound. The MSCI Asia-Pacific (ex-Japan) equity index fell to a 14-month low in what is now the indexes worse performance since March.

    [EUR, USD]
    EUR-USD has been holding a narrow range in the low 1.1600s as markets anticipate today's release of the August U.S. jobs report. We're forecasting a 210k increase in employment, with a dip in the unemployment rate to 3.8%, and a 0.2% increase in earnings. A 25 bp Fed rate hike is already priced in, and this will merely seal the deal more tightly. There is some downside risk after the "disappointing" 163k rise in the ADP private payrolls survey, which has led some to look for a softer jobs number today. In light of this, an outcome in line with our forecast, or the median forecast for 190k, would likely spark a Dollar rally. Despite recent gains, EUR-USD remains amid an overall bear trend, one that's been unfolding since mid April. Incoming U.S. data should firm-up expectations for a 25 bp Fed hike in December, which would follow an already fully-anticipated 25 bp hike in September. Fed fund futures have been discounting better than 60% odds for a December hike. We would also expect the Dollar to appreciate in the scenario of sustained risk aversion in global markets. EUR-USD has resistance at 1.1694-95.

    [USD, JPY]
    USD-JPY and more especially AUD-JPY have declined more, the former clipping a 16-day low at 110.38, before recouping toward 111.0 amid position trimming into the U.S. jobs report, and the latter falling by over 0.5% on route to posting fresh 22-month lows. The Yen was underpinned during the Tokyo session by safe haven demand and the Aussie Dollar underperformed due to Australia's exposure to China, which looks set to find the U.S. hiking tariff rates on another $200 bln worth of its exports. The MSCI Asia-Pacific (ex-Japan) index fell to a 14-month low in what is now the indexes worse performance since March. Japan's Nikkei underperformed, partly due to the Yen's strength and partly on reports that Trump is thinking of opening up a new front in his trade war with Japan. The general view seems to be that the U.S. will proceed with ratcheting-up the trade war, with the Trump administration in the belief that it is winning. Emerging market stress and tech sector weakness are also in the mix, while today's U.S. jobs report, on a brighter note, is expected to be strong. We advise trend following with regard to AUD-JPY.

    [GBP, USD]
    Sterling has been enjoying a calm following the phase of Brexit-related volatility earlier in the week. Cable is holding steady in the lower 1.2900s while EUR-GBP has settled near the 0.9000 mark. Brexit remains front and centre. UK Chancellor Hammond warned of budget cuts it the event of a no-deal exit from the EU, while government ministers have been saying that there are only two choices, either a deal based on its Chequers proposals (key parts of which are a no-go for the EU, as clarified last weekend by EU negotiator Barnier) or a no-deal exit. Regarding the latter, a minister was photographed yesterday carrying documents revealing a secret government codename for no-deal contingency planning: Operation Yellowhammer. Our view is that leaving without a new agreement would be simply be too disruptive and carry massive political risks, as it would see all 759 treaties the UK has with the EU halt overnight on March 29 next year, while, simultaneously, the 90% of UK exports that go to either the EU or one of the 60 nations covered by EU trade agreements would instantly go from zero or low tariffs to facing the highest levies under the WTO system, with the UK facing protracted horse-trading over WTO schedules and quotas and multiple years of negotiating to establish new trade and cooperative agreements. With neither the Chequers plan or the no-deal popular, there is the risk of a leadership challenge on PM May, and/or the possibility for a second Brexit referendum or even an outside chance of a general election.

    [USD, CHF]
    The Swiss Franc has been in demand since yesterday's release of the stronger than expected Q2 GDP outcome out of Switzerland. This pushed EUR-CHF back under 1.1300 and to a 14-month low at 1.1211, while USD-CHF has traded at 18-day lows and CHF-JPY at seven-month highs. Switzerland posted Q2 growth of 0.7% q/q while Q1 growth was upwardly revised to 1.0% y/y from 0.6% y/y. It's rare for Swiss data to impact the currency, but the strength of the data, which marks the fifth consecutive quarter of above-average expansion, and the strength of the manufacturing sector in particular, have invited analyst narratives questioning the need for the SNB's ultra accommodative policy. The Swiss deposit rate is -0.75%. The demand for the Franc today doesn't look to have been of the safe haven variety either, with emerging market currencies generally finding some reprieve today and with European equity markets and Wall Street holding in a broadly steady state. We don't think the SNB will be quite ready to signal a policy shift given the risk for further episodes of Franc-supporting risk aversion as the emerging market crisis (if that's what it is) plays out and given the possibility (if not probability) for a further escalation in trade protectionism. The Swiss central bank will likely be wanting to time tightening with ECB tightening.

    [USD, CAD]
    USD-CAD is becalmed in the lower 1.3100s after correcting from yesterday's seven-week high at 1.3226, with market participants on tenterhooks into the final day of this week's trade talks between the U.S. and Canada, and into Canada's August employment report. Any news of a breakthrough on the trade front would likely spark a sharp tumble in USD-CAD. As for Canada's August employment, we expect a 10.0k headline rise after the 54.1k gain in July. The unemployment rate is projected at 5.8%, which would match July's figure, while the pace of wage growth is expected to slow further. USD-CAD support at 1.3113-15.

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