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By XE Market Analysis December 11, 2013 3:34 am
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    XE Market Analysis: Europe - Dec 11, 2013

    Narrow ranges have been seen since Tuesday's London close. Moderate EUR weakness and JPY firmness provided the main theme. USD-JPY scraped out a new correction low of 102.57 in Tokyo trade, which is 84 pips down on the six-month peak that was seen the day before. EUR-JPY dipped to a two-day low of 141.14, which was 45 ticks down on yesterday's London closing level, before settling around 141.30. A similar price action has been since in other yen crosses. This reflected a backdrop of lower stock markets on both Wall Street and in Asia, which in turn reflects market indigestion at the prospect of Fed tapering, with the yen adhering to its usual correlation in this regard. The advent of risk aversion is the main risk to those anticipating fundamentally driven weakness in the currency. Japanese data came in near expectations, with the CGPI price gauge coming in at +2.7% m/.m and machinery orders at +0.6% m/m. EUR-USD is trading fractionally lower at 1.3755 bid, as was AUD-USD, at 0.9122. News that General Motor (Holden) is to close nearly all manufacturing operations by 2017 in Australia didn't impact the Aussie.

    [EUR, USD]
    Moderate euro weakness has been seen, driven by EUR-JPY. As we have noted in recent days, the euro's recent outperformance, which has come on the back of last week's ECB refrain from announcing further non-conventional stimulus, is based on shaky ground. The Eurozone has a disinflation problem, and recovery doesn't yet look to be of the self-sustaining variety with many peripheral nations still struggling. Meanwhile, the Fed is on course to taper its QE program (though the timing of this remains open), and richly-valued stock markets may be set for a more sustained correction as this prospect is digested, which in such a circumstance would be a supportive back for the yen, which could in turn drive a deeper EUR-JPY correction from the five-year peak it saw yesterday. In EUR-USD, yesterday's six-week peak at 1.3795 and the 1.3800 level, around which are reported to be strike levels of large options that are expiring this week, are marked as strong resistance levels. Above here is the 2013 high of 1.3833, and all these levels present the market with a key resistance zone, which we think may sap the momentum out of the still-bullish market given our reasoning above. Initial support is seen at 1.3750 ahead of 1.3735, the latter of which was formally a strong resistance level.

    [USD, JPY]
    USD-JPY scraped out a new correction low of 102.57 in Tokyo trade today, which is 84 pips down on the six-month peak that was seen the day before. EUR-JPY dipped to a two-day low of 141.14, which was 45 ticks down on yesterday's London closing level, before settling around 141.30. A similar price action has been since in other yen crosses. This reflected a backdrop of lower stock markets on both Wall Street and in Asia, which in turn reflects market indigestion at the prospect of Fed tapering, with the yen adhering to its usual correlation in this regard. The advent of risk aversion is the main risk to those anticipating more fundamentally-driven weakness in the currency. Japanese data today came in near expectations, with the CGPI price gauge coming in at +2.7% m/.m and machinery orders at +0.6% m/m. In USD-JPY, the current course of yen recovery has us looking at 102.50 and more especially the 102.20-25 region, as this marks trend and 20-day moving average support levels, and may encourage yen selling. The Fed's course to tapering and the ECB's refrain from announcing further non-conventional stimulus offers a contrast to the BoJ's committed anti-deflation fighting stance, though stock markets and associated risk appetite will need to remain reasonably buoyant, or at least nothing much worse than neutral, if fresh yen weakness is to be seen.

    [GBP, USD]
    The U.K. economy's status as one of the fastest growing in the OECD developed nation grouping should keep the pound broadly underpinned. Yield differentials have been an associated support, and the benchmark 10-year Gilt yield approach of 3% is starting to look almost attractive in a low yielding world, helping return sterling to the 'asset' close of currency despite the near zero interest rate policy of the BoE. GBP-JPY remains the obvious route for those wishing to position for future sterling gains, though beware of a more sustained stock market correction in the even that the U.S. Fed surprises us with a commencement of assets it formerly purchased under its QE program, as such a scenario would likely drive a rebound in the yen. Cable logged a fresh two-year high of 1.6467 yesterday and is presently settled in what appears to be a bullish pennant patter on the charts. Next target for Cable is 1.6500 and the August 2011 peak at 1.6572.. Trend line support is some way off from prevailing levels, coming in at 1.6355.

    [USD, CHF]
    The CHF is likely to remain well supported into next week's FOMC meeting in the U.S. as a significant portion of market participants are anticipating the Fed to commence QE tapering, which in the event may trigger a more sustained period of risk aversion in global financial markets. The ascent of the CHF-JPY cross to a 23-year peak is testament to the strength of the safe haven Swiss currency. USD-CHF, meanwhile, has logged a two-year low to 0.8850, and EUR-CHF a seven month low of 1.2205, which is two big figures above the SNB's 1.2000 limit, so we're still above intervention levels. Regarding the Fed, we don't expect the central bank to start tapering until next March, which might spur a relief rally in stock markets and in turn imply scope for a CHF correction, though the technical picture in USD-CHF and EUR-CHF is pretty much the opposite, and, for now, the currency will likely remain well bid. EUR-CHF support is at 1.2200-1.2205. The breach of the Jun-24 low of 1.2218 yesterday was a bearish development. Initial target is the Apr-21 low of 1.2179. We don't expect anything new from tomorrow's SNB policy review.

    [USD, CAD]
    USD-CAD has settled to lower path, correcting some of the strong gains seen following the recent strong rally that left a new major-trend high of 1.0707 last Wednesday following the BoC announcement and statement, which emphasized the downside risks to inflation. The pair looked to have become a overstretched, and yesterday's breach of former consolidation support at 1.0625-30 is a bearish signal. The 1.0600-05 zone, which encompassed former daily high points that were seen in late November, is now a key support level in play. A consolidation phase with a downward bias looks likely over the coming days with U.S. Fed policymakers having entered the blackout phase ahead of next week's FOMC, which will deprive markets of clues with regard to whether the Fed will commence tapering this month or next.

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