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By XE Market Analysis September 11, 2018 7:17 am
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    XE Market Analysis: North America - Sep 11, 2018

    The Dollar more than reversed intraday losses it saw against most currencies, and the USD index (DXY) was showing a fractional gain heading into the New York interbank open, at 95.28, up from the two-session low seen earlier at 94.88. EUR-USD concurrently fell by 50 pips to levels near 1.1590, leaving the 1.1644 two-session high in its wake. The common currency itself underperformed, correcting after a phase of outperformance, with EUR-CHF tumbling by some 40 pips in returning to the 1.1300 level, while EUR-JPY took a 70 pip spill. The correction in the Euro came as BTPs erased early-session gains, and despite an above-forecast German ZEW investor confidence reading for September (which, at -10.6, still showed pessimists outnumbering optimists, and remaining well off its long-term average of 22.9). Sterling dropped sharply after initially rallying in the wake of the July UK labour market report, which showed unexpected strength in wage growth. There didn't appear to be any news development behind the sudden U-turn, which seems to be a case of a large block of selling from an account that sought to take tactical advantage of the post-data rally in the Pound. Cable dove to a low of 1.2989 after printing a post-data high at 1.3082, and has since steadied around 1.3020-50. AUD-USD saw some chop, lifting to a 0.7128 high after seeing a 31-low at 0.7092 after disappointing August business confidence data out of Australia. The pair subsequently fell back to the 0.7100 area.

    [EUR, USD]
    The Euro has ebbed back against most currencies, correcting after a phase of outperformance. EUR-USD has descended by nearly 50 pips to levels near 1.1590, leaving the 1.1644 two-session high in its wake. EUR-CHF has tumbled by some 40 pips in returning to pressure the 1.1300 level, while EUR-JPY has taken a 70 pip trip downward. The correction comes as BTPs erased early-session gains, and despite an above-forecast German ZEW investor confidence reading for September (which, at -10.6, still showed pessimists outnumbering optimists, and remaining well off its long-term average of 22.9). We have maintained a bigger-picture bearish view of EUR-USD, anticipating incoming U.S. data to firm up expectations for a Fed hike in December, in addition to the fully factored tightening at the FOMC later this month (on the 25th-26th). We would also expect the Dollar to appreciate in the scenario of sustained risk aversion in global markets, which looks a significant risk with the U.S. set to escalate trade protectionism and the likelihood of further emerging market currency fallout as global monetary conditions tighten.

    [USD, JPY]
    USD-JPY lifted to four-day highs on Yen weakness, which has been since after the Tokyo fixing earlier. USD-JPY's high is 111.56, with the pair establishing a new trading band that is about 50 pips up on yesterday's range. Market narratives are pointing to mixed reasons for the move. There has been a Bloomberg report saying that the BoJ may raise its ETF target, while the South Korean media reported that U.S. national security advisor John Bolton said that North Korea's Kim pledged to dismantle his nuclear weapons program when he met with South Korea President Moon Jae-in last year (though there are many more recent signs that Kim is ultimately seeking to North Korea become an accepted nuclear state). U.S. stock futures have also managed modest gains, while Chinese stock markets rallied into positive territory after AM session declines into negative territory (though slumping back to near net unchanged levels so far in the PM session). Market participants are still waiting on the decision from the U.S. to proceed with the earmarked tariff hikes on $200 bln worth of Chinese imports. In the scenario that the U.S. proceeds with this, and particularly when and if there are surer signs that the trade war is impacting the U.S. economy, this could potentially be a strongly bearish circumstance for USD-JPY.

    [GBP, USD]
    Sterling dropped sharply after initially rallying in the wake of the UK labour market report, which showed unexpected strength in wage growth. There didn't appear to be any catalysing news development behind the sudden U-turn, which seems to be a case of a large block of selling from an account that sought to take tactical advantage of the post-data rally in the Pound. Cable dove to a low of 1.2989 after printing a post-data high at 1.3082, and has since steadied around 1.3020-50. EUR-GBP surged to a high of 0.8937 from 0.8888-90 before settling around 0.8900. Brexit uncertainty is reason enough to remain bearish of Sterling. Barnier's assurances yesterday that a deal could be made by early November was no more than mood music, and didn't show any actual progress.

    [USD, CHF]
    EUR-CHF has rallied strongly over the last day, concomitantly with Italian asset markets, which has seen some of the Franc's safe haven premium unwind. The Swiss Franc had also been in demand since last week's release of stronger than expected Q2 GDP out of Switzerland, which pushed EUR-CHF to a 14-month low at 1.1185. The cross has now recovered above 1.1300, to a peak so far of 1.1328. It is expense to carry a long position of Francs given the -0.75% deposit rate. We don't think the SNB will be quite ready to signal a less dovish policy shift given the risk for further episodes of Franc-supporting risk aversion as the emerging market currency crisis plays out and given the risks for a further escalation in trade protectionism. The Swiss central bank will likely be wanting to time its tightening with ECB tightening.

    [USD, CAD]
    USD-CAD has drifted to two-session lows 1.3135, returning the pairing to the lower echelons of the range that's been unfolding over the last week. Hopes for a NAFTA deal have capped the pairing over the past week, while softer oil prices have curtailed downside potential. USD-CAD has range support at 1.3108-10. Any news of a handshake on NAFTA would likely spark a sharp drop in the pairing.

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