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By XE Market Analysis December 31, 2013 2:57 am
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    XE Market Analysis: Europe - Dec 31, 2013

    USD-JPY dipped under 105.00 in quiet trade with Japan out until next Monday. The pair has posted its biggest annual gain in 2013 since 1979, driven by yen weakness as a consequence of the 'Abenomics' drive to CPI from deflation to a 2% target. EUR-USD is fractionally lower, at 1.3791 bid just ahead of the European open, consolidating gains seen yesterday following relatively 'undovish' remarks from ECB President Draghi. Market participants may be somewhat weary about buying euros above 1.3800 after the repeated failures to hold gains above here over the last two months. AUD-USD held above 0.8900 after reclaiming this level yesterday. Australian data showed that credit growth grew 3.8% y/y in November, up from 3.5% in October. The Aussie trended lower through 2013, having opened the year at near 1.05 levels, correlating with a slowing in the mining sector following a decade long boom and the associated erosion in Australian terms of trade amid a weakening in commodity prices.

    [EUR, USD]
    EUR-USD has consolidated gains seen Monday following relatively 'undovish' remarks from ECB President Draghi. Market participants may be somewhat weary about buying euros above 1.3800 after the repeated failures to hold gains above here over the last two months. The pair settled after the wild, stop driven volatility of last Friday. The short-lived spike to 1.3894 that was seen then looks like an aberration on the charts, which is essentially what it was. The move marked a sharp turnaround following the Dec-20 low of 1.3625 that had been seen following the Fed's tapering announcement. Technically, the move would appear to be a bullish development, but we would advise caution with regard to a 'validity' of the move given the low volumes.

    [USD, JPY]
    USD-JPY posted its biggest annual gain in 2013 since 1979, driven by yen weakness as a consequence of the 'Abenomics' drive to CPI from deflation to a 2% target. Japanese markets are now closed until next Monday. We expect the yen to remain on a weakening path during the early part of 2014. Japanese policymakers are pursuing a weak currency and there will be market concerns about the impact of the planned 8% rise in sales tax next April, to which the BoJ is expected to offset this by making further liquidity provisions. At its December meeting , the central bank maintained monetary policy unchanged, reaffirming its commitment to expand the monetary base by an annual 60-70 tln yen.

    [GBP, USD]
    There remains a strong fundamental case in favour of sterling. U.K. yields have recently been rising quicker than other G7 yields following a run of impressive data and S&P last week affirmed its triple-A rating of the U.K. (albeit while retaining a negative outlook due to continue risks posed to U.K. trade by Eurozone ongoing uncertainties). Forward looking survey evidence, such as PMI order data, CBI industrial trends, along with recent lending figures and house prices data, are collectively pointing to continued robust economic expansion. Cable has now been in a bullish trend for six months, reflecting a trade-weighted appreciation of the currency over this time as U.K. recovery took hold. We anticipate more of the same in 2014.

    [USD, CHF]
    EUR-CHF has remained comfortably above 1.2200. The cross had breached above 1.2200 ahead of the Christmas/new year holiday period, recovering from pre-Fed tapering decision low of 1.2166, which was the lowest level seen in eight months. The gain had reflected an unwinding in the Swiss currency's safe haven premium as the period of Fed policy uncertainty ended with its decision to commencement QE tapering. Resistance comes in at 1.2280, marks a series of former lows seen between October and November. Support is at 1.2220 and 1.2200.

    [USD, CAD]
    USD-CAD has seen some pretty choppy price action over the last coupled of wees, spiking to a major-trend peak of 1.0737 on Dec-20, subsequently diving to sub-1.06 levels before recovering the 1.0700 level once again. Much of the volatility is down to thin, year-end market conditions. Bigger picture, the pair has been looking stretched technically, with prevailing levels having deviated above the 200-day moving average by a comparatively wide margin by historical standards (the average is presently situated at 1.0440). This conviction may have been strengthened by the repeated rejections from levels above 1.0700 over the last three weeks, and we may see a period of price stasis or a deeper correction over the coming weeks. Support is suggested by the Dec-12 low of 1.0561 and the 1.0550 level, between which are encompassed a multiple of former daily lows and daily highs that were recorded over the last six-months.

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