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By XE Market Analysis December 13, 2013 3:07 am
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    XE Market Analysis: Europe - Dec 13, 2013

    The JPY dove to fresh major-trend lows, with USD-JPY leading the charge as yield differentials and the associated contrasting stances of the Fed and BoJ underpin. News that U.S. budget deal sailed through the House vote with ease boosted this trade, firming up the odds of the Fed opting for a tapering announcement at next week's FOMC meeting (though we still don't think these odds are more than 50-50). Coincidently, a Quick Corp survey of analysts found that 71% are expecting another BoJ easing by the end of calendar Q2 next year, which would offset a planned sales tax hike next April. USD-JPY rallied and took out its May peak of 103.73, setting a new long-term high of 103.92, so far. Needless to say, there is now talk of selling interest into and above 104.00, and the market is presently settled around 103.75. EUR-JPY and other yen crosses also made new highs. The Nikkei stock index celebrated the yen's weakness, which offset any concerns about Fed tapering. Elsewhere, the AUD and NZD dove. AUD-USD hit a three-month low of 0.8913. The EUR, and other main European currencies, have seen tight ranges against the USD.

    [EUR, USD]
    EUR-USD has settled in the mid-1.3700s following this week's double failure above 1.3800. The consecutive lower highs (1.3810 and then 1.3803) painting a technical picture of waning upside momentum, which the chart-minded will be alert to as prevailing levels are looking quite stretched above the 50- and 200-day moving averages relative to historical norms. ECB President Draghi made dovish remarks before the EU Parliament yesterday, helping offset the its refrain from detailing further non-standard easing measures at the policy meeting earlier in the month, and many analysts are expecting the central bank to commence a QE program next year. Meanwhile, the USD seems to be encountering a stronger bid following the successful passage of the bipartisan budget deal in the House of Reps, firming up the odds for the Fed announce QE tapering at next week's FOMC. This week's six-week peak at 1.3810 is now marked as resistance, and above here we have the 2013 high of 1.3833, forming a key resistance zone in effect, which we think may sap the momentum out of the still-bullish market. Initial support is marked at 1.3735, which was formally a strong resistance level.
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    [USD, JPY]
    The JPY dove to fresh major-trend lows, with USD-JPY leading the charge as yield differentials and the associated contrasting stances of the Fed and BoJ underpin. News that U.S. budget deal sailed through the House vote with ease boosted this trade, firming up the odds of the Fed opting for a tapering announcement at next week's FOMC meeting (though we still don't think these odds are more than 50-50). Coincidently, a Quick Corp survey of analysts found that 71% are expecting another BoJ easing by the end of calendar Q2 next year, which would offset a planned sales tax hike next April. USD-JPY rallied and took out its May peak of 103.73, setting a new long-term high of 103.92, so far. Needless to say, there is now talk of selling interest into and above 104.00, and the market is presently settled around 103.75. EUR-JPY and other yen crosses also made new highs. The Nikkei stock index celebrated the yen's weakness, which offset any concerns about Fed tapering. We presently target USD-JPY to 105.00. The main risk to those anticipating more fundamentally-driven yen weakness would be the advent of sustained risk aversion in global markets, a backdrop to which the yen would normally correlative with.

    .

    [GBP, USD]
    The pound has corrected quite sharply this week after trading at two-year peak against the dollar and five-year highs against the yen. We remain bullish. GBP-USD trend support at 1.6355 was breached, and our initial support area at 1.6320-25 has held intact, ahead of the Dec-6 low of 1.6293. This two support points mark out a key support zone. A daily close below here would be bearish signal. Bigger picture, however, we expect further advances in sterling, befitting the U.K. economy's status as one of the fastest growing in the OECD developed nation grouping. It will be difficult for U.K. policymakers to compete against the soft currency policies of the likes Japanese policymakers. Yield differentials should be supportive, with the benchmark 10-year Gilt yield's approach of 3% starting to look almost attractive in a low yielding world, helping return sterling to the 'asset' side of the spectrum, despite the near zero interest rate policy of the BoE.

    [USD, CHF]
    We expect the safe haven Swiss currency to remain broadly underpinned 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 has the potential to trigger a more sustained period of risk aversion in global financial markets. USD-CHF resistance is marked at 0.8835 and 0.8900. EUR-CHF support is at 1.2200-1.2205. The breach of the Jun-24 low of 1.2218 on Wednesday was a bearish development. Initial target is the Apr-21 low of 1.2179. Resistance shows up at 1.2250 ahead of the 20-day moving average at 1.2274.

    [USD, CAD]
    USD-CAD whipsawed higher on Thursday as the market discounts greater odds of the Fed announcing a commencement in QE taping at next week's FOMC, which contrasts the more dovish stance of the BoC. This has supported the pair via yield differentials and the risk that such a move by the Fed could herald in a more sustained correction in stock and commodity markets, which would normally be a net negative backdrop for the Canadian currency. USD-CAD recovered to the mid-1.0600s after making a two-week low of 1.0561. This brings the major-trend high of 1.0707, logged last Wednesday following the BoC announcement and statement, back into scope. The BoC statement had emphasized downside risks to inflation. Support is marked at 1.0616, the prevailing position of the 20-day moving average, and 1.0600.

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