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By XE Market Analysis August 21, 2014 3:35 am
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    XE Market Analysis: Europe - Aug 21, 2014

    The dollar will open in Europe firmly, underpinned by the FOMC minutes to the late July Fed policy meeting, released after the London close yesterday. The Fed noted a better than expected trajectory in the labour market, which saw Treasury yields tick higher and the Bund over T-bond yield differential drop to new cycle lows below -144 bp, which weighed on EUR-USD. The euro dipped to a new 11-month low of 1.3242 against the dollar during the pre-European Asia session, extending the dollar-driven declines seen following the FOMC minutes from levels around 1.3290. USD-JPY rallied to a new four-month low of 103.96, closing in on April's 104.13 peak. Japan's flash Markit manufacturing PMI for August rose to 52.4, above expectations for 51.5, not impacting the yen much but helping the Nikkei index outperform after a sub-expectations China Markit flash manufacturing PMI for August weighed on Chinese and other stock markets in Asia, with a 50.3 outcome, down on the median forecast for 51.5. The weak China numbers helped weigh on the Aussie and Kiwi currencies. AUD-USD clocked a two-month low at 0.9237, fractionally breaching August lows at 0.9239, before recovering to the 0.9250 area, still 40 pips down on the day.

    [EUR, USD]
    We remain EUR-USD bearish, targeting last Septembers low at 1.3105 ahead of 1.3000. French President Hollande said this week that the euro remains is in the process of being adjusted, and that the ECB is aware that the euro is overvalued. The Ukraine situation, meanwhile, along with the impact of sanctions against Russian on the Eurozone economy (Russia is the Eurozone's fourth largest trading partner), and the Eurozone's disinflation problem, should collectively maintain EUR-USD's bearish bias, even if the is Fed taking its time to an eventual policy tightening. Resistance is now marked at 1.3290-1.3300, and 1.3333-37 (which encompasses a series of daily lows that were seen during early- to mid-August.

    [USD, JPY]
    USD-JPY rallied to a new four-month high of 103.96, closing in on April's 104.13 peak. Japan's flash Markit manufacturing PMI for August rose to 52.4, above expectations for 51.5, not impacting the yen much but helping the Nikkei index outperform after a sub-expectations China Markit flash manufacturing PMI for August weighed on Chinese and other stock markets in Asia, with a 50.3 outcome, down on the median forecast for 51.5. We remain USD-JPY bullish, anticipating a move to the April high at 104.13. Bloomberg reportd last week that the BoJ officials are considering cutting growth forecast for FY 2014, "according to people familiar with the central bank's discussions," and the JGB 10-year benchmark yield has dipped below 0.50% for the first time in 16 months. USD-JPY support is now marked at 103.50, 102.90 and 102.45 (200-day moving average).

    [GBP, USD]
    We expect sterling to remain trading on a mixed footing, holding up fairly well against the euro an yen while softening against the outperforming dollar. The BoE MPC minutes yesterday showed the first vote split since July 2011 with members Weale and McAfferty voting for a 25 bp rate hike. However, the dovish majority at the MPC -- cited in the minutes as being concerned about currency strength, among other things -- still has the ascendency following this week's July inflation data that showed CPI falling to 1.6% y/y from 1.9%, and the first negative y/y PPI output price figure of the cycle. Cable resistance is marked at 1.6679-82 (which encompasses the 200-day moving average and yesterday's high) and 1.6700, while the technically-minded will be looking for a move to 1.6500. Bigger picture we remain sterling bullish as expected U.K. GDP of +3.2% this year would outperform most other nations, and this growth trajectory should seen slack taken up and spark wage increases at some point, which is a key metric the BoE is focusing on.

    [USD, CHF]
    EUR-CHF steadier, back above 1.2100, after clocking an eight-month low at 1.2086 on breaching supports at 1.2120 and 1.2100-2105. We expect that the threat of SNB intervention into its 1.2000 peg to deter franc buying below 1.2100, and so have been expecting the cross to base. SNB's Jordan repeated recently that the central bank remains firmly committed to defending the currency cap.

    [USD, CAD]
    USD-CAD matched the Aug-6 three-moth high at 1.0986, but has so far not breached this level. Refreshed widening of U.S. versus Canada yield differentials in the wake of the FOMC minutes have driven the latest gain in the pair. There has been talk of solid selling interest into and around the 1.1000 level, so some headwinds should be expected. The pair had earlier in the week found its feet after dipping to a seven-week low of 1.0860 last Friday. The pair recovered above key support marked by a confluence of the 20-, 100- and 200-day moving averages, contained within 1.0865-1.0885, which suggested that the technical picture was not too bearish. We are taking a more bullish view now we expect the U.S. economy to continue to recover.

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