XE Market Analysis: North America - Jun 13, 2019

The Dollar has held net steady versus the Euro and Yen, paring intraday losses in the case against the latter, while AUD-CAD dropped quite sharply amid the juxtaposition of record lows in Australian sovereign debt yields and a Loonie-supporting 2.5%-plus rally in oil prices. AUD-CAD was showing over a 0.6% loss heading into the New York interbank open, earlier printing a five-week low at $91.86. The Aussie buck was dented by the yield on 3-year Australian sovereign debt dropping below 1% for the first time ever, while hopes that the U.S. and China will resolve their differences have been fading, which is a big concern for the Aussie. The lack of a planned senior-level meeting between U.S. and Chinese officials ahead of the G20 summit in Japan in late June is apparently started to cause investors consternation, boding ill for there being any meaningful progress at the summit itself. The Canadian Dollar, meanwhile, benefited as crude prices rallied, with front-month prices of the WIT benchmark almost completely reversing yesterday's dive in posting a high at $53.10, up nearly 4.5% from yesterday's low at $50.72. News that two oil tankers have been damaged following a suspected attack in the Gulf of Oman drove crude higher. EUR-USD, meanwhile, was settled to a narrow orbit of 1.1300, above yesterday's six-day low at 1.1282. USD-JPY lifted back to the mid 108.00s after posting a 108.16 three-day low during the Tokyo session. The low came amid a backdrop of sputtering stock markets in Asia, while the rebound came as stock markets in Europe were pulled higher by a surge in telecom stocks following the completion of an auction for the construction of 5G infrastructure. Elsewhere, the Swiss France posted an on-the-fact gains after the SNB did the expected and issued dovish guidance following its policy review today.

[EUR, USD]
EUR-USD has settled to a narrow orbit of 1.1300, above yesterday's six-day low at 1.1282. We had been taking the view not to pursue trend-following of the pairing during the recent phase of ascent. Fed Funds rate futures are now fully discounting a 25 bp Fed rate cut by the July 30-31 FOMC, while easing expectations have been building with regard to the ECB and other central banks, offsetting the bearish impact of the shifting Fed view on the greenback. EUR-USD now looks to be lacking strong directional impulse. Support comes in at 1.1276-78, and resistance at 1.1347-50.

[USD, JPY]
USD-JPY has lifted back to the mid 108.00s after posting a 108.16 three-day low during the Tokyo session. The low came amid a backdrop of sputtering stock markets in Asia, while the rebound came as stock markets in Europe were pulled higher by a surge in telecom stocks following the completion of an auction for the construction of 5G infrastructure. During the Asian session, the biggest mover had been AUD-JPY, which is both a liquid forex market proxy on China and on global equity market sentiment. The cross had fallen by nearly 0.5%, as of the early European session, pegging a fresh five-month low at 74.77. The lack of a planned senior-level meeting between U.S. and Chinese officials ahead of the G20 summit in Japan in late June is apparently started to cause investors consternation, boding ill for there being any meaningful progress at the summit itself. Another concern has been the protests in Hong Kong, which drove underperformance in the Hang Seng index today. Amid this backdrop, Chinese Vice Premier Liu has called for additional stimulus measures, which helped Chinese stocks pare, but not fully reverse, intraday losses. We expect USD-JPY to remain downwardly bias, given burgeoning Fed easing expectations and assuming U.S.-China trade tensions continue to simmer. Support is at 108-00-05, resistance at 108.79-73.

[GBP, USD]
Cable has carved out a three-session high at 1.2743, drawing back in on the three-week seen last Friday at 1.2763. The gains are a reflection of broader dollar weakness, with the pound having been trading neutrally against the euro, yen and most other currencies. In trade-weighted terms, the UK currency is showing signs of settling following a five-week phase of underperformance, with markets having discounted recent political developments (EU parliamentary election results in the UK, resignation of Prime Minister May) as having increased the odds for a scenario where the UK leaves the EU without a deal on divorcing terms and without new trade deals in place. The no-deal scenario would mean that the UK would, overnight on October 31, adopt trading on WTO terms, which, as nearly all economists attest, would mark a significant deterioration in the UK's terms of trade. The UK would then start negotiating with global economies to replace the prevailing free trade with other 27 economies of the EU, and the 50 deals the European Union has with other economies around the world -- a process which would take years. This is why the pound has been trading with what we estimate to have been a 11-15% discount since the vote to leave the EU in June 2016. Although the April UK labour market report was robust, it belied an economy that is sputtering in the face of prolonged political and Brexit uncertainty. We don't seen much upside potential for the pound at this juncture, especially with arch Brexiteer Boris Johnson favourite to become the new prime minister ("BoJo" is running his campaign on a hard, no-deal-if-necessary Brexit). Betfair odds for Boris becoming PM have an implied probability of 56.5% -- far ahead of his nine rival contenders. Cable has support at 1.2691-93, and resistance at 1.2742-45.

[USD, CHF]
The Swiss Franc has rallied in the wake of the SNB policy announcement today. This drove EUR-CHF from levels near 1.1250 to near 1.1210. There doesn't appear to be a specific catalyst, and, rather, the SNB's message was in fact that downside risks to the economy have increased and that the overall policy setting "remains as expansionary as before." The central bank also nudged its inflation forecast lower, now expecting CPI to average just 0.6% y/y this year, 0.7% in 2020, and 1.1% y/y in 2021. The currency had weakened yesterday as market participants eyed today's policy decision, so today's price action has been a buy-the-rumour-sell-the-fact type of reversal. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. Last week EUR-CHF hit a 23-month low at 1.1119. Assuming U.S.-led trade tensions continue, and assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a directionally downward bias. The SNB's -0.75% deposit rate and policy of tactical intervention hasn't been sufficient to arrest recent appreciation of the franc.

[USD, CAD]
USD-CAD logged a 1.3344 rebound peak yesterday before settling back to the lower 1.3300s. This comes after the pair printed an 11-week low on Monday at 1.3243, which extended losses seen following last Friday's sub-forecast U.S. jobs data, which juxtaposed forecast-beating Canadian jobs data. Softer oil prices, after a period of strong gains, has dented the upside bias of the Canadian currency, though the improvement in U.S.-Mexican relations bodes well for the new yet-to-be-Congressionally-ratified North American trade agreement. Last Friday's USD-CAD drop was the biggest daily drop since February 22, culminating what was the biggest weekly drop since the last week of December. The pair has support at 1.3305-10, and resistance at 1.3350.