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By XE Market Analysis September 25, 2019 6:59 am
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    XE Market Analysis: North America - Sep 25, 2019

    The dollar has traded higher since the New York interbank close yesterday, recouping losses seen in the immediate wake of the impeachment news in the U.S. yesterday. EUR-USD has settled back near 1.1000 after failing to sustain gains to 1.1024, which was seen in the immediate wake of the news that the Democrats initiated an impeachment inquiry against President Trump. Regarding the attempt at impeachment, much will depend on what the evidence shows with regard the charge of Trump's alleged "betrayal of national security", while political pundits in the U.S. are almost unanimously saying that GOP-controlled Senate can be relied upon to vote against the charge of "high crimes and misdemeanors." Trump therefore is unlikely to be removed from office, while the political impact of the proceedings heading into next year's presidential election remains uncertain. The pound took a turn lower, more than giving back the gains seen yesterday. The unanimous ruling by the 11 justices at the UK's Supreme Court that deemed Prime Minister Boris Johnson's suspension of Parliament to have been unlawful has, not surprisingly, sparked a tumultuous debate between pro-Brexit and pro-EU supporters across the country, which if nothing else is serving to highlight a political system at a crippling level of Brexit distraction. UK yields have dropped quite sharply, and slightly more than U.S. Treasuries and Bund yields, which has been picked up in some forex market narratives as being a sterling selling cue. Cable has printed a low of 1.2424, extending the correction from yesterday's high at 1.2503. USD-JPY recovered to the 107.35-40 area from a 16-day low that was printed at 106.96 yesterday.

    [EUR, USD]
    EUR-USD has settled back near 1.1000 after failing to sustain gains to 1.1024, which was seen in the immediate wake of the news that the Democrats initiated an impeachment inquiry against President Trump. Regarding the attempt at impeachment, much will depend on what the evidence shows with regard the charge of Trump's alleged "betrayal of national security", while political pundits in the U.S. are almost unanimously saying that GOP-controlled Senate can be relied upon to vote against the charge of "high crimes and misdemeanors." Trump therefore is unlikely to be removed from office, while the political impact of the proceedings heading into next year's presidential election remains uncertain (and evidence dependent). For now, there may not be too much impact on the dollar. Overall, and despite some recent narrowing in the 10-year T-note over 10-year Bund yield differential, we retain a moderately bearish view of EUR-USD. The preliminary September Eurozone PMI readings, released at the start of the week, were striking for failing to show an expected improvement and instead showing a marked contraction in manufacturing activity, with service sector activity slowing sharply, leaving the composite at just 50.4, barely above the 50 point no change mark. EUR-USD is amid a long-term moderate downtrend, the latest leg of which has been in play since the late June highs above 1.1400. We expect this will remain in play. EUR-USD's recent major-trend low is at 1.0926.

    [USD, JPY]
    USD-JPY recovered to the 107.35-40 area from a 16-day low that was printed at 106.96 following the impeachment news out of the U.S., which sparked a reflexive risk-off response in markets, of which hitting the yen "buy button" is part of. Global stock markets have continued a sputtering price action following some mixed signals from the U.S.-China front, and with a U.S.-Japan trade deal snagging up as Tokyo looks for assurances on car tariffs. Beijing permitted tariff waivers for U.S. soybean imports, according to a Bloomberg report, and is apparently looking to buy pork (due to swine flu in China), though President Trump was harshly critical of China's trade practices during a speech at the UN yesterday. There are good reasons for circumspection regarding the trade war, which has been dragging on for well over a year now, and the pattern so far in the repeated rounds of (so far) fruitless discussions is that initial optimism and upbeat and at times conciliatory rhetoric gives way unambiguous disappointment. Meanwhile, the situation in the Mideast remains fragile and a potential source of destabilisation, via oil prices, for the global economy, which in turn could lead to demand for yen. In Japan, BoJ Governor Kuroda said this week that policymakers are examining ways to further enhance the sustainability of its yield curve control (YCC) policy, specifically the profitability of financial institutions.

    [GBP, USD]
    Sterling rallied quite strongly into the ruling of the UK's Supreme Court that the government's decision to suspend Parliament was unlawful. Cable hit a high of 1.2490 after jumping from levels under 1.2420. The pair since settled back under 1.2450. The ruling doesn't quash the possibility for an eventual no-deal Brexit, with the fate of Brexit to be shaped by the upcoming general election (and possible confirmatory referendum, depending on which party or alliance/coalition of parties prevails). The timing of the pound's rally is interesting, as it came in the minutes ahead of the decision, which itself difficult to predict. The Supreme Court judged that Parliament's suspension had the effect of frustrating or preventing Parliament from undertaking its constitutional duties. The decision was unanimous among the 11 justices. This is unprecedented, so what precisely happens now is unclear, though Parliament will reopen. Prime Minister Johnson said before the decision that he would no resign if the Court ruled against him, though opposition have been loud in demanding it following the ruling. One legal pundit at the FT termed the decision as a major recalibration of the UK's executive, judicial and legislative branches.

    [USD, CHF]
    EUR-CHF is down for a fifth consecutive day, today printing a 13-day low at 1.0842. The cross has dropped in each day since the SNB's policy announcement last week, which will be frustrating to Swiss policymakers given their chronic concerns of the franc's chronic state of overvalue (which regularly tops the Economist magazine's Big Mac purchasing parity comparison of currencies). The 26-month seen in early September at 1.0811 has so far remained untroubled, but looks vulnerable. The SNB, to recap, kept both interest rates and its language on the currency unchanged, as had been widely expected. The policy rate and deposit rates were both left at -0.75% and the central bank repeated that that Franc remains "highly valued", while highlighting fragile markets and affirming the commitment to intervene in currency markets if needed. There was one surprise in the statement as the SNB changed the way the negative deposit rate is calculated with a new exemption threshold, designed to reduce costs for institutions as the global low-rate environment has "become more entrenched and could persist for some time yet". This means that the SNB followed the ECB, which also took steps to limit the impact of negative rates on banks, and the step may also prepare the ground for a mid-meeting move in Switzerland should Brexit developments turn sour. The growth forecast for this year has already been cut to just 0.5-1.0% from around 1.5% expected at the time of the June policy review, with the SNB highlighting that global risks remain tilted to the downside.

    [USD, CAD]
    USD-CAD rebounded back above 1.3250 after posting a nine-day low at 1.3232. The paring continues to lack directional impulse, which is been much the case for over a week now, with rises and falls quickly followed by a gravitational rotation back towards the 1.3250 level. The recent pronounced drop in U.S. Treasury yields (down nearly 25 bp from September 13) hasn't been a bearish force as it might have been with the Canadian dollar having lost support from oil prices, which have now more than given back the price gains seen in the immediate wake of the attack on Saudi crude production and distribution facilities. The pledged release of strategic crude reserves in the U.S., China and Japan, along with a quicker than expected path to the resumption of crude production in the afflicted sites in Saudi Arabia have brought crude pries down, which in turn has seen the Canadian dollar lose demand. Front-month WTI crude is trading under $58.00. For now, USD-CAD looks set to remain in the directional wilderness.

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