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By XE Market Analysis November 7, 2013 2:25 pm
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    XE Market Analysis: Asia - Nov 07, 2013

    The dollar surged higher in early N.Y. trade, as the ECB surprised the market, and cut interest rates by 0.25 %. EUR-USD gapped to 1.3354 from over 1.3500 immediately after the rate cut, and after the better U.S. GDP print, but in a base of 1.3295. The greenback moved broadly higher after the rate cut, posting gains versus all the major currencies. USD-JPY was lifted to near 99.40 from 98.80, as USD-CHF traded over 0.9250. The euro, and the dollar generally reversed course when Draghi said that exchange rate is not a policy target and did not play a role in today's discussions. EUR-USD inched its way over 1.3430 in light afternoon trade. Once Asia reacts to today's surprise ECB move, we look for FX trade to consolidate into Friday's October U.S. employment report.

    [EUR, USD]
    EUR-USD plunged on ECB's rate cut. It dropped from 1.3500 to 1.3355 on the 25bps cut. Since late last week speculation had risen that the ECB would cut rates after the weak CPI reading. However, yesterday's MNI source story that tipped a steady hand confused the picture. We think the market was short into the announcement, but the timing of the move caught many offside and this added conviction to bearish EUR bets.EUR-USD rebounded once 1.3300 broke. It hit 1.3295 lows and then headed back over 1.3350 after Draghi said that exchange rate is not a policy target and did not play a role in today's discussion. EUR-USD offers were seen in place at 1.3380, and up to 1.3400, which capped gains until after the London close. Asian sovereign names were reportedly on top, along with Continental option desks. Buy-stops were seen from 1.3410, as weak shorts which sold under 1.3400 likely cut out positions on the move over the level.

    [USD, JPY]
    USD-JPY consolidated above 99.00 after the post-U.S. GDP move higher. The EUR sell-off over the ECB rate decision gave USD-JPY the liquidity to clear option barrier exposure. The dollar is in decent shape for another push higher and if payrolls data comes in on the firmer side tomorrow then USD-JPY could threaten the 100.00 level. We heard of some interesting market conjecture today regarding a huge cash pile of 'dead money' held by Japanese lifers. BoJ policy is expected to fuel large flows from zero interest investment into more risky assets like domestic and global related equity funds. Some conservative estimates reckon sums of up to $200 bln could be invested overseas. The 100 level may have to wait however, as an ugly USD-JPY moved ensued, resulting in a 97.60 low following the break back under 99.00. It appeared weak longs, which bought into positions around 99.25 in the aftermath of the ECB rate cut, headed for the exits in unison on the move under 99.00. A lack of liquidity was cited on the way down, exacerbating the move. Earlier, talk of heavy option backed sellers from 99.30-40 was noted, which effectively capped gains.

    [GBP, USD]
    Cable fell in sympathy with EUR-USD and hit intra-day lows at 1.6010. Meanwhile, EUR-GBP plunged to 0.8300 from 0.8400 on the surprise ECB rate cut. Comments from Draghi were dovish, but not surprising in order to justify the rate move. He also left the door open on further measures and reiterated the ECB's forward guidance, leaving the EUR under pressure. The last time EUR-GBP was trading at these levels was in January and light corporate support and option related flows could go through here. Cable later recovered back over 1.6100, as the cross moved up to 0.8345.

    [USD, CHF]
    USD-CHF zoomed up to 0.9250 after the ECB rate cut, and stronger U.S. GDP data. EUR-CHF meanwhile, dove from near 1.2340 to 1.2285 lows. While verbal ECB assurance of an easing bias failed to convince markets that the ECB has turned more dovish than the Fed, today's move clearly proved otherwise and that may help to keep a lid on the EUR, much to the SNB's chagrin.

    [USD, CAD]
    USD-CAD traded out of the 1.0400 area after the combination of ECB rate cut and firmer U.S. GDP, though only managed 1.0453 highs. The stronger growth outcome in the U.S. is in all likelihood a CAD positive in the bigger picture, with the two economies so closely meshed. This afternoon however, with risk appetite faltering, the CAD stayed down into the close. USD-CAD will likely turn sideway overnight, as traders await the twin Canadian and U.S. employment reports on Friday.

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