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By XE Market Analysis August 30, 2013 2:55 am
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    XE Market Analysis: Europe - Aug 30, 2013

    The dollar held on to a firmer tone as yesterday's better than expected U.S. data kept alive expectations for Fed tapering and supported yields. The immediate risk of a military strike against Syria is reduced and this weighed on global bonds and stocks rallied. This theme carried into Asia and left EUR heavy under 1.3250 and USD-JPY consolidated gains over 98.00. A heavy Japanese data schedule supported recovery expectations, yet also reduced the need for further stimulus from the BoJ, which weighed on domestic stocks. Meanwhile, a Reuters poll of Japanese fund managers revealed that allocations of Eurozone bonds rose to the highest level in 10 months.

    [EUR, USD]
    EUR-USD consolidated at softer levels following Thursday's sell-off, which was influenced by dollar demand from sovereigns and real money at month end. EUR made an attempt to move back over 1.3250, which lacked follow through and it drifted in a sideways trading pattern into the European open. The immediate risk for the EUR is on the downside based on the technical backdrop, though good support should slow the downturn ahead of 1.3200. As we move into next week the focus should shift back to central bank policy with the ECB meeting due next Thursday followed by Friday's NFP data.

    [USD, JPY]
    USD-JPY and the JPY crosses were boosted on month-end flows and a general rise in risk appetite. USD-JPY moved back into the 98.50 region on good demand over the Tokyo fix. EUR-JPY was supported close to 130.00 and AUD-JPY was steady around the 87.80 area. Japanese data did not have a direct impact on JPY, though as the Nikkei met profit taking there was some USD-JPY supply that went through ahead of the weekend. A broad pick up in domestic data was a positive for the current Japanese policy stance, but also reduced the need for further stimulus. Economy Minister Amari said the numbers were a positive for next year's sales tax hike. The BoJ are likely to maintain the current pace of stimulus until next year, but could review the situation when the sales tax is due to come into effect from April.

    [GBP, USD]
    Cable is still tied to 1.5500, where option maturities are expected to roll off for the second consecutive session. Underlying dollar strength limited upside momentum, but sterling has shown resilience via the crosses. In particular, EUR-GBP saw an absence of usual month-end flows and was weighed by liquidation of long positions. GBP-CHF also experienced very good demand as the prospect for an imminent Syrian strike faded. BoE Carney said in a press interview that his first duty is to return the U.K. to self sustaining growth, adding that the recovery picks up the sooner rates will rise.

    [USD, CHF]
    CHF was weighed by the improvement in risk appetite. However, most of the action in the last 24 hours has been driven by the USD and followed closely by GBP flows. Month end related dollar demand and the rise in U.S. yields lifted USD-CHF over 0.9300 for the first time in two-weeks on Thursday. EUR-CHF gradually edged away from 1.2300 and extended through 1.2315 following U.S. data, although it is still struggling due to the downturn in the EUR and recent topside failures. We are doubtful though on EUR-CHF's ability to sustain higher levels given geopolitical risks and pre-weekend action could be less favourable for speculative positioning.

    [USD, CAD]
    USD-CAD is back on the front foot again after it reclaimed the 1.05 handle during Thursday's London session and then pushed back towards 1.0535-40 by the North American close. The mix of data from either side of the border was supportive, along with the downturn in oil and it edged up through 1.0540 overnight. There is resistance into 1.0550 and large stops are building behind 1.0570.

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