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By XE Market Analysis September 21, 2017 7:16 am
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    XE Market Analysis: North America - Sep 21, 2017

    The dollar posted fresh highs versus the yen, Swiss franc and some other currencies, though the overall breadth and momentum of gains waned as markets digest the Fed's hawkish up-gearing. EUR-USD floated back above 1.1900, leaving unchallenged yesterday's post-Fed low at 1.1861. USD-JPY, by contrast, managed to lift to a new four-month high, at 112.71, with the BoJ re-committing to prevailing dovish policy settings and means.

    [EUR, USD]
    EUR-USD settled back above 1.1900 after yesterday diving from levels just above 1.2000 to a low of 1.1861 in the wake of the Fed's policy announcement, where it commenced the expected start of balance sheet normalization (quantitative tightening) but signalled via the dot ploy that policymakers are planning on making another four 25 bp rate hikes -- one before year-end and the other three in 2018. This came with markets having already largely discounted an expected shift in ECB policy. We expect the dollar's bid will have legs, and EUR-USD, after rallying strongly since April, from levels near 1.0500, now looks set for a relatively sustained corrective phase. A one-third correction would return EUR-USD to near 1.1600, which is a target framework that seems reasonable at this juncture. Resistance is at 1.1968-70.

    [USD, JPY]
    USD-JPY has remained buoyant, finding bids at 112.25 after correcting off a new four-month high at 112.71, which was seen early in the London session. The high was seen after BoJ Governor Kuroda said it was "hard to show a specific exit strategy" during his post-policy meeting press conference, where he distanced the BoJ's stance to that of the Fed and other central banks. He said that the BoJ will "patiently continue accommodative policy to achieve 2% inflation," and that "we will take further monetary easing steps if necessary." He also stressed the central bank's commitment to its yield curve control policy remained unchanged in the wake of the Fed's hawkish guidance. The BoJ earlier announced unchanged policy. We expect USD-JPY to remain underpinned for now. Support comes in at 111.99-112.00, while the July peak at 114.49 provides a target. This risk to a bullish view would be re-appearance of a risk-off theme in global markets, as such phases tend to drive USD-JPY lower. North Korea's march to nuclear ICBM is the main threat to the apple-cart on this front, and we advise watching developments closely.

    [GBP, USD]
    The pound has traded mixed in the wake of the Fed's announcement yesterday, losing ground to the outperforming dollar while managing to make gains versus the euro and yen. Yesterday's solid official UK retail sales data for August, which rose by 1.0% m/m, smashing expectations for a 0.2% m/m expansion, has given sterling a fundamental underpinning, helping cement market expectations for the BoE to reverse last August's post-Brexit vote 25 bp rate cut at the November MPC meeting. We advise sterling bulls to avoid Cable, as we expect the dollar to remain bid, and instead focus on EUR-GBP, or more especially GBP-JPY and GBP-CHF.

    [USD, CHF]
    EUR-CHF has remained buoyant, clocking a new 32-month high for the second time in three days, this time at 1.1581. A an ebb in geopolitical tensions 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 bolted to a two-week high of 1.2391 in the wake of the Fed's hawkish guidance, which has helped readdress the recent imbalance between the respective Fed and BoC outlooks. We expect the pair to hold up for this reason now. This comes amid signs that the four-month bear phase in USD-CAD, during which time the U.S. buck lost 12% to the Canadian dollar, was starting to wane. Last week was the first up week in last five weeks, while momentum indicators were showing that the bear trend had been starting to look overstretched. The early-September high at 1.2415 provides an initial target ahead of 1.2500. Support is at 1.2283-85. Incoming Canadian data include wholesale sales report for July, due today, which we seen falling by 1.0% m/m. Tomorrow brings August CPI, which we see at 1.6% after 1.2% in July, and retail sales are expected to grow 0.3% in July.

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