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By XE Market Analysis September 18, 2017 7:09 am
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    XE Market Analysis: North America - Sep 18, 2017

    The dollar started the new week on a mixed footing, managing to eke out a fresh two-month high versus the yen, at 111.44, recouping of the ground lost last week against the pound, while oscillating well within Friday's range in the case against the euro and the Canadian dollar, among other currencies. The main event this week will be the FOMC, with the Fed announcing on Wednesday. The BoJ also meets, announcing Thursday.

    [EUR, USD]
    EUR-USD has been making time in the mid 1.19s in early-week trading. Friday's flurry of U.S. data left Treasury yields slightly lower, after some chop, and the dollar without fresh directional impulse. Markets have been factoring in the ECB's path to tapering QE, though a lot of this story would seem to have been priced into EUR-USD by now. The FOMC is this week's main event, while North Korea will doubtlessly be waiting in the wings to spring a malevolent surprise. The Fed will announce its decision on Wednesday, where it is widely anticipated to mark the start of the process to deleverage its balance sheet, which is intended to be very gradual in nature as per the path the central bank laid out in June. Of more importance will be the dot-plot forecasts and about what they suggest about rate moves this year and through 2018. On balance, we think the Fed's guidance might just be sufficiently hawkish to give the dollar a bid, although nothing too dramatic as caution will be evident in the communication given geopolitical risks and the hurricane impact.

    [USD, JPY]
    USD-JPY edged out a new two-month high, at 111.42, with the pair buoyant into the Fed and BoJ policy announcements on Wednesday and Thursday, respectively. While the Fed is expected to start gradual quantitative tightening, and at the least remind markets that another hike in the fed funds rate is in the works, even if not for some time, the BoJ is widely expected to reaffirm its commitment to ultra-accommodative policy amid a cool inflation backdrop and continuing concerns about the self-sustainability of economic growth. Markers also expect Japan's August trade report (Wednesday) to show a narrowing in the surplus to JPY 50.0 bln from 421.7 bln, and the July all-industry index (Thursday) to contract by 0.2% m/m. Assuming there is no flare up in geopolitical tensions -- which, admittedly, is by no means certain as North Korea marches toward nuclear ICBM capability -- we would expect the yen to remain under pressure against the dollar and other major currencies. USD-JPY has support at 110.79-80. The July-16 high at 112.20 provides an upside target.

    [GBP, USD]
    Sterling has started the week on a steady footing after rallying strongly last week following the BoE's unexpected hawkish turn, with the central bank having laid the groundwork for a first-in-a-decade rate hike. Cable settled in the upper 1.35s, off the 15-month seen on Friday at 1.3616. We recommend selling into sterling's gains. The September Rightmove house price index for the UK came in weak, and a Markit survey found the squeeze on household incomes is the biggest in three years. The Brexit process hasn't been going smoothly, and there are fresh signs of division in PM May's Conservative Party after Boris Johnson was rebuked by the head of the head of the UK official states office for rehashing false figures about Brexit savings.

    [USD, CHF]
    EUR-CHF has settled to the upper 1.14s after failing to sustain gains above 1.1500 last week, when a six-week high at 1.1529 was printed. The franc took a knock on the SNB 's post-policy meeting guidance, with the central bank, while admitting that exchange rate overvaluation is now less acute, stating that it would remain willing to "intervene in FX markets as necessary" which is "essential in order to reduce the attractiveness of the Swiss franc investment and thus ease pressure on the currency." The SNB said that the currency "remains highly valued," even in light of the relatively sharp weakening the currency saw from late July. We look for EUR-CHF to test early-August 32-month peak is at 1.1538, and continue to advocate that the cross will make an eventual return to the SNB's former floor level, at 1.2000.

    [USD, CAD]
    USD-CAD firmed up some after posting a three-day low at 1.2119 on Friday. The pair last week managed its first up week of the last five weeks, a sign that the downside bias has lost puff. The pairing fell by some 12% since May, reflective of the Canadian economy's pulling out of the low-oil-price-era doldrums and consequential commencement of a BoC tightening cycle. Presently, momentum indicators are flashing oversold, with the 14-day relative strength index at a 28.0 reading (sub-30.0 readings are when the trend has stretched itself relative to historical norms), so caution is advised to trend followers. USD-CAD has support at 1.2080-82.

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