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By XE Market Analysis December 2, 2013 3:10 am
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    XE Market Analysis: Europe - Dec 02, 2013

    EUR-USD was lifted on the coattails of sterling, which was a notable mover during pre-European Asian trade, rallying quite strongly apparently on a growing market sense that 2014 may be a bullish year for the currency. News were mixed, with reports of soft Thanksgiving period retail sales in the U.S., above-expectations China PMI and Australian building data. Helping to precipitate the move in sterling was an article in the U.K.'s Telegraph newspaper predicting an optimistic tone to the upcoming mid-fiscal year update to be presented by Chancellor Osborne this Thursday, which is to be expected given the recent sharp improvement in tax revenues, though the article seemed to act as a catalyst for the interbank nonetheless. Stops had a big impact in the thin-volume, pre-London market. GBP-USD breached key levels at 1.6400 and logged a two-year plus high of 1.6443, EUR-GBP dove to its lowest levels since January, and GBP-JPY shot above 168.00-168.20 to new major-trend highs. EUR-USD lifted above 1.3600, marginally up on its London closing of Friday. Wednesday's pre-U.S. holiday weekend 1.3557 low is initial support. USD-JPY and EUR-JPY was slightly firmer. BoJ's Kuroda repeated his usual dovish signal that the central bank is ready to ease more if needed. .

    [EUR, USD]
    EUR-USD lifted above 1.3600, marginally up on its London closing of Friday. Wednesday's pre-U.S. holiday weekend 1.3557 low is initial support. The Eurozone calendar has more ECB speakers on the schedule, but so close to this week's December policy meeting officials will be cautious and are unlikely to give much away. We expect the ECB will remain on hold this week following last month's rate cut, though also expect it to introduce measures to boost loan growth via non-standard measures. This may curtail EUR-USD's upside potential.

    [USD, JPY]
    USD-JPY and EUR-JPY was slightly firmer in early week trade. BoJ's Kuroda repeated his usual dovish signal that the central bank is ready to ease more if needed while sounding optimistic about progress towards making the 2% inflation target. Last week's high of 102.61 is the next target. The day's high so far has been 102.59. Selling interest is seen clustered ahead of option barriers at 103.00 and 103.25, while Japanese importers are reported to be reliable bidders to the downside. .

    [GBP, USD]
    Sterling was a notable mover during pre-European Asian trade, rallying quite strongly apparently on a growing market sense that 2014 may be a bullish year for the currency. Helping to precipitate the move in sterling was an article in the U.K.'s Telegraph newspaper predicting an optimistic tone to the upcoming mid-fiscal year update to be presented by Chancellor Osborne this Thursday, which is to be expected given the recent sharp improvement in tax revenues, though the article seemed to act as a catalyst for the interbank nonetheless. Stops had a big impact in the thin-volume, pre-London market. GBP-USD breached key levels at 1.6400 and logged a two-year plus high of 1.6443, EUR-GBP dove to its lowest levels since January, and GBP-JPY shot above 168.00-168.20 to new major-trend highs. We advise going with the flow as this week's U.S. PMI surveys and government fiscal statement are likely to be bullish for sterling. We target Cable to 1.6500.

    [USD, CHF]
    CHF has been steadily firming against the USD for about three weeks and we look for a close below a daily close below 0.9060 to confirm this. Friday's low at 0.9028 provides the initial target while trend support comes in at 0.8990. EUR-CHF looks to remain steady. The cross found a good bid under 1.2300 last week. The highlight on the Swiss calendar this week is November CPI data, which we expect to tick back to a -0.1% y/y rate following the unexpected dip to -0.3% y/y in October. The continued fractional deflation problem, which is occurring despite the currency limit peg, will ensure that Swiss policymakers remain fully committed to ultra-easing monetary policy despite improving economic fundamentals. The SNB has deployed counter-cyclical measures to rein in property prices. Since the ECB turned more dovish in November, the SNB has defended its own stance and warned markets that it will defend the CHF limit peg against the EUR in unlimited amounts, and would also consider other options if needed.

    [USD, CAD]
    USD-CAD looks likely to remain bias higher into Wednesday's BoC policy meeting. The BoC surprised last month by eliminating any reference to policy tightening, but is now under pressure to adopt a full blown easing bias due to soft inflation data. The 2011 peak of 1.0658 offers the next target, while a leading U.S. house called for a USD-CAD target at 1.1400 next year. The BoC is widely expected to keep the policy rate at 1.00% and maintain the dovish language that points to currently accommodative rates being left in place for an extended period, but a shift to an easing bias is possible. However, we doubt the Bank will take that step just yet, noting acceleration in Q3 GDP and core CPI that is on track to meet the BoC's 1.4% Q4 estimate, which in the event might prompt a near-term rebound in the CAD.

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