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By XE Market Analysis August 21, 2013 2:54 am
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    XE Market Analysis: Europe - Aug 21, 2013

    The dollar consolidated against EUR, GBP and CHF in Asia. There was further price chop via JPY and AUD, but overall activity was quieter than recent sessions as investors turned their focus to Fed policy ahead of today's FOMC minutes. USD-JPY found support on dips, leaving the 97.00 level intact and it managed to carve out a rally over 97.50 despite the latest news that the Fukushima nuclear plant had experienced its worst leak for two years. Intra-day traders were also encouraged by yesterday's pledge from BoJ Governor Kuroda on easy policy until it reached its inflation target. Elsewhere, AUD chopped either side of 0.9050 and ended Asia around 0.9030 as the commodity bloc currencies struggled on concerns that reduced central bank stimulus could impact growth.

    [EUR, USD]
    EUR-USD managed to close above 1.3400, which provided a positive lead early on. However, appetite for risk was still low and this limited heavier buying interest. There was conjecture that the recent pick up in the EUR was a consequence of funds reducing exposure to emerging markets in favour of European stocks, along with macro fund demand. There is some reluctance to hold aggressive dollar long positions in the face of increased volatility in U.S. Treasury markets. The EUR may have scope for further gains in this environment or at least until the Fed can get a handle on its communication strategy before it begins to taper policy.

    [USD, JPY]
    USD-JPY experienced choppy action on a 97 handle. Overall, Japanese accounts were comfortable in buying dollars into 97.00 in Asia after large 96.80 stops held on Tuesday. Yesterday's pledge on policy from BoJ Governor Kuroda raised expectations that the BoJ may ease again in the long term in order to meet its inflation target and could come in line with Japan's anticipated sales tax hike, which is due from next April. For now BoJ will focus on managing policy expectations, leaving the impetus on the Fed outlook. On an intra-day basis the pair should chop from 97.00-20 to 98.00, where good offers are noted.

    [GBP, USD]
    Cable broke to 1.5695 highs on Tuesday EUR-USD gains lifted it within a few pips of 1.5700 barriers. However, EUR-GBP's push up to 0.8580 fueled light GBP sell-interest and this has absorbed Cable's ability to rally. Cable topside hedging continues to go through the options market, with fund names hedging for a break above trendline resistance around 1.5750 in the near-term. Longer dated strikes traded as high as 1.6000 over the last week, though if the Fed gets a handle on its communication strategy then the dollar could reassert itself before long. U.K. data today of note is the CBI industrial trends survey, which is expected to improve in line with other areas of the economy.

    [USD, CHF]
    EUR-CHF settled ahead of 1.2300 after volatility during yesterday's European morning session. Fund safety plays were offset by a EUR-USD topside break as dollar support continued to crumble ahead of the FOMC minutes. USD-CHF has maintained levels under 0.9200 today and interest should remain light until the Fed reveals more details on the policy outlook. EUR-CHF should experience limited upside as the failure over 1.2400 last week and subsequent move under 1.2300 yesterday will encourage selling pressure on upticks.

    [USD, CAD]
    USD-CAD continued its move higher after it reached better than one-week high over 1.0400 on Tuesday. More selling via the commodity bloc currencies was evident in Asia and Europe again and USD-CAD broke to 1.0435. Option barriers in in view at 1.0450. Equity markets are still fragile and commodity traders are beginning to ponder the implications of reduced central bank stimulus. The downturn this week reflects a broad reduction in risk. The thinking is the growth outlook may be impaired should the Fed and other central banks pull back on stimulus.

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