XE Market Analysis: North America - Jun 12, 2019

The Yen has seen a modest outperformance as a risk-back-off theme ensued in global markets, while the Dollar picked up bids at the expense of the Euro, which came under pressure after German and Portuguese auctions of 10-year paper produced record low yields. The Aussie and other commodity currencies saw moderate underperformance, correlating with declines across global equity bourses. The biggest mover out of the main Dollar pairings and associated cross rates was AUD-JPY, which is an effective forex market barometer of risk appetite in global markets. The cross ebbed by nearly 0.3% in making an eight-day low at 75.31. USD-JPY printed a two-day low, at 108.21. EUR-USD, meanwhile, saw some chop, edging out a three-session high at 1.1340 during pre-Europe trading in Asia before ebbing back under 1.1315. In the mix was a rally in the Pound after Boris Johnson, the odds-on favourite to become the new UK prime minister, said at his official launch of his campaign that he is not aiming for a no-deal Brexit. That was the cue for markets to carry Cable to a new three-session high, at 1.2753, drawing further in the three-week seen last Friday at 1.2763.

[EUR, USD]
EUR-USD edged out a three-session high at 1.1343, coming within 4 pips of the three-month high seen last Friday. Recent price-movement dynamics have mostly reflected Dollar volatility, with the U.S. currency diving in the wake of last Friday's sub-forecast U.S. May jobs report (which exacerbated fears that slowing in manufacturing and capex on trade uncertainties are spilling over to the broad economy and labor market) before rallying back on the news that the U.S. and Mexico have reached a deal on migration, which allayed investor concerns on trade and igniting a 6bp-odd spike in the 10-year U.S. T-note yield. This came after EUR-USD posted a 1.5% rise last week, the biggest weekly advance since August last year. The pair now looks stuck without strong directional impulse. U.S. inflation figures this week are the biggest market-moving risk this week, along with retail sales at the end of the week. The CPI data will be scrutinized as it's inflation that's the nexus of the FOMC's policy stance. But we're not forecasting anything threatening with respective gains of 0.1% and 0.2% for the headline and core. Tame data would be supportive for Treasuries, and weaker than expected results could further heighten Fed rate cut expectations down the road, which would in the event likely spark a fresh rotation lower in the Dollar. EUR-USD has support at 1.1276-78, and resistance at 1.1347-50.

[USD, JPY]
USD-JPY printed a two-day low at 108.30 amid modest risk-back-off theme, which drove a bid for Yen and offers for commodity currencies. The biggest mover out of the main Dollar pairings and associated cross rates has been AUD-JPY, which is an effective forex market barometer of risk appetite in global markets. The cross ebbed by nearly 0.5% in making an eight-day low at 75.19. In equity markets, Asian markets gave up opening gains and drifted moderately into the red. S&P 500 futures also went negative after the cash version of the index closed flat on Wall Street yesterday after a five-day winning streak. The relief rally on easing U.S.-Mexico tensions flagged out, while even the prospect for fresh stimulus in China failed to sustain Chinese stock markets. Data showed Japan’s April core machinery orders rising at the quickest pace in more than six months, though this series is notoriously volatile month-to-month, and didn't have much bearing on market sentiment. As for the U.S. vs China situation, planned meetings between top-level officials from both sides at the upcoming G20 gathering have arrested what had started to seem to be an irrevocable downward spiral in relations between Washington and Beijing. Focus today will fall on the release of U.S. CPI data.

[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]
EUR-CHF yesterday extended to a two-week high at 1.1247 before settling moderately lower. The gains reflected an unwinding in safe-haven positioning following U.S.-Mexico developments and the recent burgeoning in central bank easing expectations. The gain put some further space in from the 23-month low that was printed at 1.1119 earlier in the week. The SNB's Alternate Governing Board Member Moser said recently that in his view "if we had higher interest rates then we would have a stronger exchange rate", which something the central bank is ever eager to prevent. The SNB contianues to bank on the combination of a negative deposit rate and the threat of ad hoc currency intervention to keep the CHF under control, while trying to limit the impact of the negative rates on the domestic economy with the help of macroprudential instruments. Moser said that the risks in the Swiss real estate sector remain bearable, although he admitted that in the current environment these could increase.

[USD, CAD]
USD-CAD logged a 1.3309 rebound peak yesterday before settling back under 1.3300. The pair remains in a consolidation after printing an 11-week low on Monday yesterday 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 boding well for the yet to be ratified North American trade agreement. USD-CAD dove sharply on Friday to an 11-week low at 1.3262 in what was the biggest dialy drop since February 22, and the biggest weekly drop since the last week of December, before extending further south this week, posting a three-month low at 1.3243. The pair has resistance at 1.33005-10.