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By XE Market Analysis November 6, 2013 2:13 pm
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    XE Market Analysis: Asia - Nov 06, 2013

    FX trade was largely quiet in N.Y. on Wednesday, as the market prepped itself for Thursday's ECB meeting. There was a brief flurry in EUR-USD when MNI reported ECB sources to have said there would be no rate cut on Thursday, which resulted in a modest euro rally. While the euro has recovered some into the ECB on short covering, we see further upside risk should the Bank indeed keep rates steady. The euro and other major dollar pairings steadied through the afternoon in very light dealings. On the economic front, U.S. leading indicators came in slight better than forecasts, though had little market impact.

    [EUR, USD]
    EUR-USD motored higher in early trade, as ECB sources told MNI that an ECB rate change was unlikely tomorrow despite the recent inflation dip. EUR rallied from 1.3515 toward 1.3550 on short covering and a stop hunt could be on the cards if 1.3570 deals. The market may react cautiously to the news and coming so close to tomorrow's ECB meeting it may not represent the consensus. However, it does fit in with the view that ECB can afford to wait at least one more month before acting, which would enable it to tie in a policy move when liquidity drops further as banks payback more funds related to LTROs. Later, EUR-USD pulled back to lows near 1.3515. The pairing reportedly ran into strong option related selling interest ahead of 1.3550, which stopped the rally in its tracks. With the market now likely positioned for the ECB, we look for mostly sideways action to prevail into Thursday's European session.

    [USD, JPY]
    USD-JPY hovered on either side of 98.60, close to the top of the intra-day range. Large option expiries rolled off at 99.00 to 100.00 and there may be better prospects for higher levels. Of course the potential for sustained dollar upside will lie with U.S. data due over the remainder of the week and Fed taper risk. From a flow perspective, option protection since late September could drop off. Outstanding barriers that lie from 99.00 to 100.00 aren't due to expire until late November, reducing the immediate need to hedge gamma and opens up topside risk.

    [GBP, USD]
    GBP's correction was influenced by technical levels. Cable topped out after failing at October-29 highs at 1.6119 on three occasions on the short-term chart before turning back to 1.6080. The move coincided with a EUR-GBP rebound out of 0.8380 as the cross matched October-3 lows near 0.8378. Economic fundamentals and recent technical studies are favourable for GBP, but U.S. data in the latter part of the week is a potential risk as strong data would support the dollar. Tomorrow's ECB policy announcement is also going to be a challenge for EUR-GBP traders. Most of the recent cross weakness has been on ECB rate cut risk and helped GBP outperform.

    [USD, CHF]
    CHF edged lower against the EUR and the USD as equity markets in Europe firmed up. EUR-CHF moved up through 1.2320 as the 1.2300 level held in early Europe and USD-CHF found buyers near 0.9100 and is close to 0.9120. Eurozone services PMI provided a modicum of support for the EUR, though momentum was clipped by a weaker than expected Eurozone retail sales release and a reluctance to add risk ahead of tomorrow's ECB policy outcome. Given the data/event risks that are due on Thursday and Friday is seems likely that the CHF will move within a narrow trading band.

    [USD, CAD]
    USD-CAD remained hemmed in overnight, managing a 1.0459 to 1.0436 trading band. More of the same is likely in order ahead of the ECB meetings and U.S. jobs report on Friday, though the Canadian Ivey PMI helped the CAD marginally. USD-CAD slipped from near 1.0440 to 1.0412 lows before recovering over 1.0420. Bids are in pace at 1.0400 with offers from 1.0460, which should continue to keep things in order ahead of the RCB on Thursday.

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