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By XE Market Analysis January 2, 2014 2:58 am
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    XE Market Analysis: Europe - Jan 02, 2014

    Happy 2014. It's been very quiet in early new year trade, with Japan remaining closed and with staffing levels remaining depleted in many financial centres, with today being a long weekend 'bridge holiday' for many following yesterday's break. EUR-USD is trading near familiar levels around 1.3750, and USD-JPY likewise around 105.30. AUD-USD is marginally lower at around 0.8915-20, having dipped briefly to sub-0.8900 levels following weaker than expected official PMI data out of both China and Australia today (51.0 and 47.6 respectively). Japan's BoJ governor Kuroda reaffirmed in an interview with the Yomiuri newspaper that the central bank remains committed to driving CPI to 2% target, and that to this end it won't necessarily limit or scale back its stimulus program at the end of the originally delineated two year period. Kuroda also said that while he expects GDP to slow in calendar Q2 following the planned April rise in the sales tax (to 8% from 5%), he doesn't anticipate a permanent economic shock from the hike. Note that Latvia joins the euro today.

    [EUR, USD]
    EUR-USD opened the new year around familiar levels near 1.3750. 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 has 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. Note that Latvia joins the euro today.

    [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 remain 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]
    Sterling opens 2014 near two year highs against the USD after a six-month rally phase that tallied with recovery in the U.K. economy after a prolonged period of stagnation. There remains a good 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 this month affirmed its triple-A rating of U.K. sovereign debt (albeit while retaining a negative outlook due to continued risks posed to trade by Eurozone uncertainties). Forward looking survey evidence, such as PMI order data and CBI industrial trends, along with recent lending figures and house prices data, are collectively pointing to continued robust economic expansion. There are caveats, and the main issue for U.K. policymakers is that recovery has been too much driven by rising consumption and household debt and not enough by capital investment and export success. Despite such concerns, we expect sterling to continue trending higher during the early part of 2014.

    [USD, CHF]
    EUR-CHF has remained firm, having breached above 1.2200 ahead of the Christmas/new year holiday period as it recovered 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 weeks, 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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