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By XE Market Analysis August 7, 2013 11:55 am
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    XE Market Analysis: Asia - Aug 07, 2013

    The dollar headed lower, forcing the USD index back below the 200-dma for the second session. The downturn in the dollar came even after a revival in Fed taper talk on Tuesday. The move lower was a function of persistent USD-JPY weakness through 96.50 and a heavy short covering rally in Cable over 1.5500 after the BoE Inflation Report and Carney presser went down like a lead balloon. EUR made inroads over 1.3300, though progress was still slow due to very heavy real money supply into 1.3350. The commodity bloc currencies were weighed by broad stock market weakness, which lifted USD-CAD through the top of the range to trade around 1.0445 and AUD-USD recovered to 0.9000 from the 0.8920-30 region.

    [EUR, USD]
    EUR-USD made a slow progressive move higher. Dollar selling elsewhere provided EUR with the traction to move up from 1.3300 to 1.3330. Price action since last Friday has been positive since it rebounded from under 1.3200. EUR bulls have been reluctant buyers at current levels due to Fed policy risk. However, the topside presents the best potential for more aggressive moves as shorts are likely to bail if real money offers from 1.3350 give way.

    [USD, JPY]
    USD-JPY extended recent losses ahead of Thursday's BoJ policy outcome. After breaking the key 97.50 level on Wednesday it headed under 96.50 as U.S. accounts established short positions from 97.20-30 at the N.Y. open. Overnight, bearish leads included the 4% drop in the Nikkei after the 14k level gave way. The risk-off tone was compounded by Fed taper risk, while yesterday's USD-JPY drop was also a negative trigger. In the coming sessions, USD-JPY longs could cut positions further as repatriation very likely to pick up amid very large U.S. bond redemption and coupon payments in the second half of August.

    [GBP, USD]
    GBP added to post-BoE gains in N.Y. and long-standing retail accounts were stopped as 1.5500 barriers gave way to print highs around 1.5530. Cable posted outsized short covering rally from 1.5205 over the BoE Inflation Report and presser from BoE Governor Carney. There were mixed views from analysts, but most agree that any further QE is highly unlikely. If Carney's plan was to stop money market rates from heading higher than his first post-IR presser will be judged as a failure. Short sterling traded much weaker, along with Gilts as the new 7% employment threshold was contingent on the inflation outlook. Looking at the interest rate market the first BoE hikes are being priced in at the end of 2014 and early 2015, even though the BoE said that no tightening signals are seen until early 2016 based on current conditions.

    [USD, CHF]
    CHF strengthened on USD-CHF weakness. It topped out just over 1.2320 during the European morning and headed back below 1.2300. The bulk of the sell off came during the N.Y. session when a USD-JPY drop forced USD-CHF through the bottom of the recent range to trade just under 0.9220.

    [USD, CAD]
    USD-CAD broke the top of the recent range amid a fall in risk assets and weak domestic data. Canadian building permits plunged 10.3% in June, though it can be a volatile release, while the July Ivey PMI slumped to 48.4 sa, which was well below the 56.0 median. USD-CAD posted the best part of its gains during the European morning as Fed policy risk boosted the dollar and worked against commodity bloc currencies due to a broad downturn in global stocks. In North America it progressed from 1.0430 to 1.0445, but very large offers at 1.0450 capped and there was predictable speculation of option exposure.

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