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By XE Market Analysis September 20, 2017 7:45 am
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    XE Market Analysis: North America - Sep 20, 2017

    The dollar traded generally softer as markets anticipate the Fed's policy announcement and statement. The pound was notable today as it rallied strongly on above-forecast retail sales data out of the UK, but subsequently gave back most of its gains as the latest tri-monthly BoE agents survey of anecdotal activity made for less rosy reading.

    [EUR, USD]
    EUR-USD lifted to a nine-session high at 1.2020, despite a report yesterday of there not being a consensus among ECB policymakers about when to begin tapering. EUR-JPY remained buoyant, although below the 22-month high seen yesterday. 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, and the Fed will announce its decision today, 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 has settled to a consolidation after rallying quite strongly over the last week amid a risk-on backdrop in global financial markets, which the yen tends to correlate inversely to, and as markets anticipate the Fed and BoJ policy announcements, due today and tomorrow, respectively. The Fed is widely anticipated to announce the start of a gradual program to balance its balance sheet (quantitative tightening), and while leaving the Fed funds rate unchanged, we anticipate sufficient hawkish undertones in its revised projections and tone of statement to give the dollar a bid. The BoJ by contrast is expected to reaffirm its commitment to ultra-accommodative policy given tepid inflation and policymaker concerns that economic growth continues lack self sustainability. Overall, we take a bullish view of USD-JPY. Support is at 110.89-90.

    [GBP, USD]
    Sterling bolted higher on the UK retail sales beat, which markets have taken as effectively endorsing the BoE policy statement of last week, which laid the groundwork for gradual policy tightening in the months ahead. The pound is presently showing a average 0.4% gain versus the G3 currencies. Cable logged a high of 1.3607 after rocketing from 1.3510-12 ahead of the data release, though has since settled around 1.3560. Offsetting the good news form the retail sales report is the latest BoE Agents Report, released earlier, which is a survey of anecdotal activity across the economy, covering the period from May to August of this year. The report found that demand growth in a number of consumer-facing sectors had slowed, and that investment intentions had weakened with the dominant services sector. The report is better gauge on the underlying conditions, while retail sales data can be volatile month-to-month. We anticipate Cable will chop sideways for now, with markets factoring in modest tightening while retaining some concerns about the outlook.

    [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 has continued to consolidate in the upper 1.22s after springing on Monday a two-week high at 1.2338 as the Canadian dollar dove following remarks by BoC member Lane, who said that the Trump-instigated NAFTA renegotiation is a source of uncertainty for Canadian businesses and the economy. This followed the pair last week making 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. With the Fed, we expect, seen providing sufficient hawkish undertones to generate a bid in the U.S. buck at today's post-FOMC announcement. We anticipate further upside in USD-CAD. Support is at 1.2208-10. The September-26 peak at 1.2415 provides and upside target.

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