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By XE Market Analysis August 28, 2013 2:31 am
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    XE Market Analysis: Europe - Aug 28, 2013

    Risk aversion continued to drive interest in Asia as stocks suffered from rising risk of a military strike against Syria. The dollar was mixed though as the downturn in Treasury yields kept it on the defensive. However, it held firm against AUD and NZD as emerging Asia FX continued to experience heavy outflows. USD-JPY and USD-CHF were soft due to unwinding of speculative positioning, which benefited JPY and CHF. EUR continued to threaten the 1.3400 region, but could not overcome Asian sovereign flows, while EUR-CHF and EUR-JPY supply were also a negative driver.

    [EUR, USD]
    EUR-USD threatened the 1.3400 region again. However, large Asian offers capped and it drifted back to 1.3375 by the European open. Overall, EUR has struggled to break out of the recent range as cross-flow and reserve management activity restrict directional bias. Short term accounts are still long of EUR and left trailing stops under 1.3300. Real money and Asian reserve management are expected to cap, along with month-end activity.

    [USD, JPY]
    USD-JPY remained heavy and an early move in Asia cleared away bids at 97.00 to force a 96.82 low. There was very good support around the lows. Option backed demand and real money flows lifted it back over 97.00 and it headed to 97.30 by the Tokyo close. Price action has been disjointed in recent sessions. JPY has outperformed in Asia, while Europe has seen mixed flows into JPY, CHF and USD. In N.Y. on Tuesday the dollar suffered from a downturn in U.S. yields, but it could start to see inflows from safe haven demand and reserve management activity. There was also speculation yesterday that month-end activity could be more favourable for the dollar in the latter part of the week. Large USD-JPY stops are noted under 96.80.

    [GBP, USD]
    GBP is soft ahead of today's testimony from BoE Governor Carney. Cable is trading close to 1.5500 and EUR-GBP is trading around 0.8625. There are expectations that Carney will back the BoE's forward guidance. However, the market may be sensitive to comments on inflation, which was the catalyst for very heavy GBP inflows over the BoE Inflation Report. How Carney responds to the rise in market rates could determine GBP direction. If Carney does not specifically offer his opinion on the rise in market rates since forward guidance was introduced then the market could take that as a green light to take GBP back to recent highs.

    [USD, CHF]
    CHF posted modest gains since the start of the week as risk aversion accelerated on Syria. EUR-CHF fell from 1.2350 on Monday and broke below 1.2300. The downturn in EUR-CHF has slowed under 1.2300 as range players bought the dip into 1.2280, where local name demand emerged early last week. USD-CHF headed under 0.9200 in N.Y. and has traded a very tight range close to 0.9170.

    [USD, CAD]
    USD-CAD is trading close to 1.0500 after it experienced a correction over Tuesday's North American session. Offers ahead of 1.0550 put a top in place and it headed back to the 1.0470 area. Stop losses were a factor on the way down and sources tipped very heavy real money demand for CAD$. Movement in Asia was driven by equity market moves and CAD$ drifted lower in line with stocks, which suffered on risk aversion. CAD-JPY also came under pressure from Japanese interest and this was a supportive factor for the dollar pairing.

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