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By XE Market Analysis April 1, 2014 3:45 am
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    XE Market Analysis: Europe - Apr 01, 2014

    No big movements among the main currencies today. China's official manufacturing PMI for March came in fractionally above expectations at 50.3 while the HSBC-Markit version came in fractionally below expectations at 48.0. Japan's Tankan report on business sentiment came in shy of expectations, with sentiment among large manufacturers at 17 in March, up from 16 in December but below the consensus forecast for 20. The Tankan also forecast a drop to 8 in June, below the median for 13. The data set didn't have a big impact on markets. USD-JPY drifted slightly higher amid a backdrop of flat stock markets, while Reuters reported that a BoJ official said that the decline in the Tankan outlook exceed those seen at previous sales tax hikes (with regard to today's implementation of a 3 percentage point high in the sales tax, the first hike in this tax since 1997). Japan's finance minister, Aso, said that the tax hike is important to ensure fiscal credibility. The RBA announced unchanged policy, and the statement repeated the now boilerplate view that a period of interest rate stability lies ahead, noting that the rise in the AUD will reduce the "assistance" to the economy that was seen during 2013. AUD-USD managed to pop to a new four-month high of 0.9304 but was quickly knocked lower, eventually steadying around 0.9270-80. Elsewhere, EUR-USD was steady around 1.3770-80.

    [EUR, USD]
    The euro has consolidated in the upper 1.37s, settling after the EUR-JPY led rally of Monday. EUR-JPY remained perky today following weak Tankan survey of business sentiment out of Japan, and with the 3 percentage point sales tax hike being implemented today, with these two factors seen supporting expectations for further BoJ stimulus by the end of Q2. In the case of EUR-USD we would prefer selling into strength. Initial resistance is marked at 1.3821 (Mar-26 high), while we place key resistance and risk at 1.3875-1.3900. The drop in Eurozone headline HICP inflation to just 0.5% should support speculation for ECB implementing QE later in the year.

    [USD, JPY]
    The yen remained soft following weak Japanese data today and with market commentaries noting that the passing of the financial year-end in Japan having brought yen-supporting repatriation flows to a halt. USD-JPY drifted slightly higher amid a backdrop of flat stock markets, and EUR-JPY also remained perky. Japan's Tankan report on business sentiment came in shy of expectations, with sentiment among large manufacturers at 17 in March, up from 16 in December but below the consensus forecast for 20. The Tankan also forecast a drop to 8 in June, below the median for 13. Reuters reported that a BoJ official said that the decline in the Tankan outlook exceed those seen at previous sales tax hikes (with regard to today's implementation of a 3 percentage point high in the sales tax, the first hike in this tax since 1997). Japan's finance minister, Aso, said that the tax hike is important to ensure fiscal credibility. Ahead, the BoJ's aggressive reflation policy should favour continued yen weakness, though the threat to yen bears, as always, would be a re-emergence of risk aversion in global markets, a backdrop that would normally support the yen. We target 105.00 in USD-JPY.

    [GBP, USD]
    Sterling has lost some ground to the euro this week, and has remained stable against the USD. Fundamentals remain supportive, we think. Incoming data have shown that economic recovery remains robust and we have had some relatively hawkish BoE-speak. The central bank's FPC (unit responsible for financial stability) said that it is "vigilant to emerging vulnerabilities," highlighting property market risks. Overall, the evident durability of the U.K. recovery, aided by a pick-up in conditions on the continent and recovering health in the banking sector, has underpinned sterling despite some recent protestations from some policymakers about the high level of the pound. We would also suggest sterling bulls consider GBP-JPY, targeting a test of the Mar-7 at 173.58.

    [USD, CHF]
    EUR-CHF has drifted lower after making a one-month peak of 1.2234 on Wednesday. The up move had reflected further unwinding of the Swiss franc's safe-haven premium. The cycle low of 1.2104 was left unchallenged during the recent risk-off phase. We see potential for a recovery to the 1.2300-1.2400 area, but this assumes there are no renewed flare-ups in geopolitical tensions. The 1.2200 is now marked as a support level. SNB's Jordan earlier in the month that the central bank would defend the 1.2000 limit if concerns about Ukraine drove the franc higher. We don't advise speculative accounts to hold long CHF exposures below 1.2100 given the threat of SNB intervention ahead of 1.2000. The SNB has signalled that it would only consider removing it if inflation was much higher (CPI dipped back to -0.2% y/y in February).

    [USD, CAD]
    USD-CAD has broken below some key support levels over the last week, on route to a three-week low within a whisker of 1.1000. The strength in the Canadian dollar tallies with notably gains that have been seen in the AUD and NZD currencies. This in turn reflects a shift to a less pessimistic global outlook (to which the dollar-bloc currencies are sensitive to) than we saw recently with regard to the China slowdown theme (now offset by expectations of stimulus), and the threat from the geopolitical situation between Russia and the West. USD-CAD's mid-March surge to new cycle high of 1.1278 now looks to have been what technical analysts would call a false breakout. We don't advise getting too carried away with a bearish USD-CAD view as the Fed vs BoC stance remains supportive. Key supports are pegged at 1.0955 (the Mar-6 low) and 1.0910 (the Feb-19 low).

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