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By XE Market Analysis September 19, 2017 6:43 am
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    XE Market Analysis: North America - Sep 19, 2017

    The dollar has traded mixed into the New York interbank open and into the start of the two-day FOMC, posting fresh highs versus the yen and Swiss franc, firming against the pound, while seeing new lows against the euro and Australian dollar. This partly reflects that markets have low expectations from the Fed with regard to tightening guidance, anticipating the central bank to announce the start of a gradual process to unwind its balance sheet, but not much beyond that. USD-JPY clocked a new two-month high at 111.88 before settling lower. USD-CHF edged out a three-session high, while Cable took a tumble back under 1.3500 amid following through selling of pounds in the wake of Carney's softening yesterday of what he clearly sees as an overly hawkish interpretation of the BoE's posting-meeting statement last week. . In contrast, EUR-USD edged out a new one-week high at 1.2005, though good offers above the figure put a lid on the euro's advances. EUR-JPY rallied into 22-month high terrain, and EUR-CHF hit a new 32-month peak.

    [EUR, USD]
    EUR-USD has been pushed back under 1.2000, with gains having stalled in the at 1.2005-06. Reportedly decent sized offers put a ceiling in place, which we think makes sense ahead of the FOMC announcement tomorrow. 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. The Fed will announce its decision tomorrow, 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 come under fresh pressure, posting losses against the dollar, euro and yen, among other currencies. Cable sank back under 1.3500 to a 1.3468 low, down from pre-European open levels near 1.3560 and bringing yesterday's low at 1.3465 back into play. The pound fell into fresh three-day low terrain in the case against the euro. The doesn't appear to be a catalyst, rather a follow-on move following BoE Governor Carney's walking back yesterday of what he obviously thought was an overly hawkish interpretation of last week's BoE statement. To recap, Carney said that "any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent," stressing that there "remain considerable risks to the UK outlook." We had be warning that the pound's outsized gains looked overcooked.

    [USD, CHF]
    EUR-CHF rallied to a new 32-month high of 1.1563. A an ebb in geopolitical tensions and fresh euro gains have been underpinning, along with last week's SNB 's post-policy meeting guidance, where the central bank, while admitting that exchange rate overvaluation is now less acute, stated 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 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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