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By XE Market Analysis January 2, 2015 3:07 am
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    XE Market Analysis: Europe - Jan 02, 2015

    The new year has began with a dollar rally as markets in Asia ran with the central theme that's been seen since around July last year. This seemed apt as the dollar's yield advantage improved over the last week against some currencies, and at least remained near cycle highs versus other currencies. The 10-year T-note over Bund spread, for instance, broke to new highs above 160 bp as markets speculate that the ECB is on course for a Jan-22 announcement of a QE program (prelim Dec Spanish HICP, released on Dec-30, was fuel for this as it fell to -1.1% from November's -0.5%). ECB boss Draghi also said in an interview with Handelsblatt that the risk of the central bank not fulfilling the price mandate is greater now than six months ago. EUR-USD extended to a fresh 29-month low at 1.2046 in Asia, bringing our long standing target at 1.2405 (the July 2012 low) onto the near horizon. Sub-1.2000 levels look likely before long. USD-JPY, meanwhile, popped back above 120.00, making a peak of 120.50 so far, up from the Dec-30 low at 118.86. AUD-USD, buoyed by a long-awaited rebound in iron ore prices last week, also dipped on the broader strength of the greenback.

    [EUR, USD]
    We remain EUR-USD bearish. Our long-standing target at the July 2012 low at 1.2042 has almost been met, and sub-1.20 levels look likely before long. There has been a fresh shift in the dollar's yield advantage this week with 10-year U.S. T-note yield differential over the equivalent bund widened over the last week to new cycle highs near 165 bp, up from levels around 147-48 bp seen before the Fed announcement on Dec-17. The market, meanwhile, is speculating that the ECB will announce QE at its Jan-22 policy meeting, with concerns about disinflation outweighing the recent improvement in survey data. EUR-USD resistance is marked at 1.2097-1.2100 and 1.2169-70, support at 1.2042-45 and 1.2000.

    [USD, JPY]
    USD-JPY popped back above 120.00 on broader dollar strength, making a peak of 120.50 so far, up from the Dec-30 low at 118.86. We remain bullish with 'Abenomics' policies likely to maintain the dollar's yield advantage over the yen, even if Fed tightening prospects remain tentative. USD-JPY support is marked by former range lows at 119.96-120.09, and resistance is marked by recent range highs at 1.2073-82.

    [GBP, USD]
    Cable remains in the grip of a bear trend, which has been persisting since the July cycle high at 1.7192. Resistance is now marked at 1.5634 (20-day moving average) and 1.5700, support at 1.5500 and 1.5486. The August 2013 low at 1.5102 should be in the crosshairs of bears. The drop in UK inflation to a six-year low of 1.0% has strengthened the dovish voices at the BoE's MPC.

    [USD, CHF]
    EUR-CHF has established a range below 1.2050 after spiking to a 1.2096 peak Dec-18 after the SNB implemented a negative interest rate of -0.25%. SNB member Zurbruegg recently argued that a negative interest rate would be an effective tool as permanent excess liquidity in the Swiss financial system exceeds 300 billion francs. SNB boss Jordan had said recently that upward pressure on the franc has "intensified," and the central bank said it will enforce the cap with "utmost determination" and is prepared to take further steps if necessary.

    [USD, CAD]
    USD-CAD has settled to a consolidation around 1.1600 amid a backdrop of steadier oil prices. We anticipate that the CAD-bearish narrative, based on weakening oil price trend, is likely to sustain for a time yet. Support is marked at 1.1550-65.

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