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By XE Market Analysis February 21, 2014 2:34 am
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    XE Market Analysis: Europe - Feb 21, 2014

    Ranges have been narrow during the Asia session. Mild yen weakness was seen as stock markets recovered poise, particularly the Nikkei, which surged and closed with an impressive 2.9% gain. The BoJ minutes to the January 21-22 showed that members decided that there is a need to emphasize that its QE program is not limited to a two-year timeframe. USD-JPY drifted to a high of 102.60, which is less than 25 pips up on yesterday's London closing level and shy of Wednesday's three-week peak at 102.74. EUR-USD flat-lined in less than a 10 pip range in the low 1.37s. AUD-USD saw a little bit of chop, eventually dipping to a sub-0.9000 levels as market talk spread of a bold forecast by Deutsche Bank for the Aussie to fall as low as 0.6000 in 2015 (BlackRock recently forecast 0.8500). Elsewhere, the PBoC guided USD-CNY to a three-month low of 6.1176, and the IMF advised India on a contingency plans to deal with any future bouts of global currency market volatility that may arise as a consequence of the U.S. Fed's tapering course.

    [EUR, USD]
    EUR-USD flat-lined in less than a 10 pip range in the low 1.37s during the Asia session. The euro has settled after correcting to a 1.3685 low yesterday. We anticipate further EUR-USD weakness. Eurozone PMI data showed France moving further into contraction territory and the overall Eurozone composite reading falling slightly against expectations for an ongoing improvement. This backdrop should see the possibility of introducing a negative deposit rate be a topic in ECBspeadk into the March policy meeting. Technically, the EUR-USD picture is bearish, particularly if we close out the week under 1.3700-1.3725. The two-week run higher to the Tuesday peak of 1.3773 stalled shy of 1.3800, and this follows the multiple rejections from 1.38+ levels over the October to December period, which had been associated with a notable drop in upside momentum following a six-month rally phase.

    [USD, JPY]
    Mild yen weakness was seen as stock markets recovered poise, particularly the Nikkei, which surged and closed with an impressive 2.9% gain. The BoJ minutes to the January 21-22 showed that members decided that there is a need to emphasize that its QE program is not limited to a two-year timeframe. USD-JPY drifted to a high of 102.60, which is less than 25 pips up on yesterday's London closing level and shy of Wednesday's three-week peak at 102.74. The is little directional impetus in USD-JPY now. BoJ policy would favour continued weakness, but the threat of China slowdown and its negative consequences on global stock markets is an offsetting yen-supportive force. Resistance is marked at Wednesday's three-week peak at 102.74, ahead of 103.00-103.10, which encompasses the 50-day moving average. Support is at 102.00 and 101.66, ahead of major support at 100.00-100.63, the latter of which is the 200-day moving average.

    [GBP, USD]
    Cable met good selling into 1.6700 on Thursday, which sent the pair to a one-week low of 1.6625. The pound had been bid by remarks by BoE's Weale, who said that that a rate rise was like by spring 2015 and that an earlier hike would be possible if wages started to rise quickly. However, there has been scant sign of wages rising so far, which remain firmly negative in real terms despite the employment-driven drop un unemployment of the last six months, while a rate hike by mid year 2015 is not far from existing expectations. Weale had voted to keep the repo rate at the record low of 0.5% this month, and we think his remarks about the possibility of a sooner-rather-than-later rate hike were meant only in a hypothetical sense. We anticipate further sterling underperformance in the period ahead. The unexpected pop in unemployment to 7.2% from 7.1% and the dip in January CPI to a new cycle low of 1.9% y/y supports the BoE's prevailing dovish policy stance. Cable support is at 1.6625-1.6600. Resistance at 1.6700-10 and 1.6740.

    [USD, CHF]
    EUR-CHF traded below 1.2200 on Thursday for the first time since Feb-5 as risk aversion stepped up following a disappointing China PMI report for February. The break of support at 1.2206 (the Feb-13 low) and 1.2200 brings the Dec-17 cycle low of 1.2167 back into scope. SNB-speak this month reaffirmed the strong commitment to maintaining the 1.20 limit peg, and would only consider removing it if inflation was much higher (CPI has been steady at just 0.1% y/y over the last three months, and the outlook remains benign). We don't advise speculative accounts to hold long CHF exposures below 1.2100 given the threat of SNB intervention ahead of 1.2000.

    [USD, CAD]
    USD-CAD has continued to climb after surging through resistance is at 1.10130-1.1050 on Wednesday following weak data out of Canada, while the spike in risk aversion following a disappointing China PMI survey added further pressure on the Canadian currency. The spike higher also breached both the 20- and 50-day moving averages. The technical picture looks less clean now. Big resistance levels now loom, marked by 1.1200 and the Jan-31 major-trend peak at 1.1224.

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