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By XE Market Analysis April 3, 2014 2:47 am
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    XE Market Analysis: Europe - Apr 03, 2014

    USD-JPY rose for a four consecutive day and breached above 104.00 for the first time since Jan-23, as the yen continued the softening trend that's been in place since the start of the new fiscal year in Japan. Markets continue to anticipate a further BoJ easing to offset the sales tax hike that was implemented this week. JP Morgan, for instance, is forecasting an easing in July. A backdrop of bullish domestic and global stock markets has also helped the yen lower, given the currency's normal inverse correlation with equity market direction. Elsewhere, sterling popped higher as a newspaper interview made by BoE Governor Carney hit the newswires. Carney said it would be possible to see a rate rise before the next election, which is due by mid-2015. We think the market overreacted as his comments, overall, didn't say anything new, and his point about the election was merely that policy decisions would be made independent of the political cycle. Cable nonetheless rose about 35 pips to an intraday high of 1.6660 before settling lower. EUR-GBP ebbed to a two-day low of 0.8260. EUR-USD, meanwhile, consolidated yesterday's losses in a narrow range around 1.3760-70. AUD-USD logged an eight-day low of 0.9205 following Australia trade and retail sales data.

    [EUR, USD]
    EUR-USD has steadied in the low 1.38s. We favour a lower EUR-USD over time, targeting 1.3500 and below, based on the divergence between Fed and ECB policy paths, with the former having already signalled that a rate hike is on the horizon while the latter remains embroiled with fighting a threat of deflation. EUR-USD resistance is marked at 1.3770 and 1.3800-15.

    [USD, JPY]
    USD-JPY rose for a fourth consecutive day and breached above 104.00 for the first time since Jan-23, as the yen continued the softening trend that's been in place since the start of the new fiscal year in Japan. Markets continue to anticipate a further BoJ easing to offset the sales tax hike that was implemented this week. JP Morgan, for instance, is forecasting an easing in July. A backdrop of bullish domestic and global stock markets has also helped the yen lower, given the currency's normal inverse correlation with equity market direction. We have been targeting 105.00 in USD-JPY.

    [GBP, USD]
    Sterling popped higher as a newspaper interview made by BoE Governor Carney hit the newswires. Carney said it would be possible to see a rate rise before the next election, which is due by mid-2015. We think the market overreacted as his comments, overall, didn't say anything new, and his point about the election was merely that policy decisions would be made independent of the political cycle. Cable nonetheless rose about 35 pips to an intraday high of 1.6660 before settling lower. EUR-GBP ebbed to a two-day low of 0.8260. The market had been quite bullish on sterling over the previous week, though unexpected weakness in the March U.K. Markit manufacturing PMI survey presented a speed bump to market expectations. Bigger picture, Cable looks to be amid broad period of stasis, centred around 1.6500-1.6800. We would suggest sterling bulls focus on GBP-JPY.

    [USD, CHF]
    EUR-CHF has settled around the 1.2200 level after making a one-month peak of 1.2234 last week. 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 steadied around 1.1050-1.1100 after a run lower in recent days that broke below some key support levels, on route to testing 1.1000. USD-CAD's mid-March surge to new cycle high of 1.1278 now looks to have been 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 support levels are pegged at 1.0955 (the Mar-6 low) and 1.0910 (the Feb-19 low).

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