Market Analysis North America By DBFN.

DBFN

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The Dollar gave back some of the gains seen yesterday, concomitantly with a correction in global stock markets as participants took a more circumspect view of the weekend's declaration of a truce between the U.S.
and China. EUR-USD climbed back above 1.1300, driven by about two parts Dollar weakness and about one part Euro out performance, with the common currency managing to eke out gains against the Yen, Swiss Franc, Sterling, and a number of other currencies today, before sub-forecast Eurozone PPI data provided further dovish fodder for the ECB board. USD-JPY corrected some from the two-week high seen yesterday at 108.53, making a low so far at 108.20. Sterling made a return to underperforming ways after yesterday's underwhelming UK June PMI was followed up a much worse than expected construction PMI report today, laying bare the impact that prolonged Brexit uncertainty and slowing growth on continental Europe is having on the UK economy. Cable extended to a two-week low at 1.2617. Elsewhere, USD-CAD ebbed into the lower 1.3100s after posting a four-session high at 1.3145 late yesterday.

[EUR, USD]
EUR-USD has climbed back above 1.1300, driven by about two parts Dollar weakness and about one part Euro outperformance, with the common currency managing to eke out gains against the Yen, Swiss Franc, Sterling, and a number of other currencies today. We don't advise trending following EUR-USD higher. Sub-forecast Eurozone PPI data provided further dovish fodder for the ECB board, while the abatement in Fed easing expectations since the weekend has given the Dollar a firmer base. The one-month high seen last week at 1.1412 is likely to remain out of reach, and we expect a continued neutral-to-declining bias over the coming phase. Bigger picture, EUR-USD has been in a bear trend since early 2018, though downside momentum has abated markedly in recent months, with the pairing looking to have found a rough equilibrium. Resistance comes in at 1.1344-47.

[USD, JPY]
USD-JPY has corrected some from the two-week high seen yesterday at 108.53, making a low so far at 108.20. EUR-JPY and some Yen crosses also came under pressure, which in turn was concomitant with a correction in global stock markets as participants took a more circumspect view of the weekend's declaration of a truce between the U.S. and China. Developments on this front are likely to remain bigger drivers of USD-JPY and overall Yen directional than Japanese data or events. Key differences around industrial strategy and national security remain between the two sides, particularly the U.S. accusation that China has been cheating its way to tech dominance. With 11 rounds of trade talks having come and gone, it remains unclear whether these differences can be resolved. USD-JPY has support at 108.04-07.

[GBP, USD]
Sterling made a return to underperforming ways after yesterday's underwhelming UK June PMI and a much worse than expected construction PMI report today laid bare the impact that prolonged Brexit uncertainty and slowing growth on continental Europe is having on the UK economy. Cable today extended to a two-week low at 1.2617. Given the decamping in Fed easing expectations away from a 50 bp move as soon a next month, the pound is likely to remain downwardly biased against the Dollar, particularly as the big miss in yesterday's release of the June manufacturing PMI survey portends downside risk to Wednesday's release of the services PMI report. We estimate that the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and don't see much scope for this to reverse anytime soon. As for Brexit, the news flow has remains quiet in terms of substantive developments. That will change as soon as the new prime minister, most likely no-deal-Brexit-if-necessary Boris Johnson, takes up the reigns (which should be by mid month). Cable has resistance at 1.2650-52.

[USD, CHF]
EUR-CHF has found a footing after coming under signifiant pressure last week, in the wake of ECB President Draghi's eyebrow raising dovish shift, which has been the most notable of a growing chorus of dovish voices on the central bank's governing council. The cross printed a 23-month low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will doubtlessly be displeasing to the SNB (the EUR-CHF cross being a good proxy on the Swiss currency's trade weighted value). The SNB restated at its quarterly policy review this month 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. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. Assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a declining bias. The SNB's -0.75% deposit rate and threat of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

[USD, CAD]
USD-CAD ebbed into the lower 1.3100s after posting a four-session high at 1.3145 late yesterday. Oil prices yesterday scaled to six-week highs, which had given the Canadian currency a lift. Last week's eight-month low at 1.3059 remain in scope. The pair has support at 1.3128-30, ahead of 1.3080-85.