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By XE Market Analysis January 6, 2015 3:13 am
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    XE Market Analysis: Europe - Jan 06, 2015

    A USD-JPY sell-off led broader dollar declines as the currency corrected a chuck of recent gains. Sharp declines in equity markets, and especially an underperformance in the Nikkei 225, which lost over 3% relative to the MSCI Asia Pacific's 1.1% decline, boosted the yen, as per the currency's usual inverse correlation with equity markets during heightened periods of risk aversion. The losses follow the worst day in global equities in 18 months (according to Bloomberg analytics), with market narratives blaming the continued decline in oil prices, which dove under $50 by the NYMEX futures measure, as unsettling markets. USD-JPY dove to a three-week low of 118.65, two big figures down versus Monday's high. EUR-JPY clocked two-month lows. EUR-USD, meanwhile, lifted to a peak of 119.68 from the low 119s, and AUD-USD and Cable saw similar advances. The dollar's decline comes concomitantly with a dip in its yield advantage, with the 10-year T-bond differential over the Bund, for instance, having dropped to the 150 bp, about 10 bp lower than a day ago and 15 bp down on levels seen last week.

    [EUR, USD]
    EUR-USD is firmer today as the dollar corrects some of outsized advances seen over the prior two trading days. The greenback's decline comes concomitantly with a dip in its yield advantage, with the 10-year T-bond differential over the Bund having dropped to the 150 bp, about 10 bp lower than a day ago and 15 bp down on levels seen last week. This follows some dovish Fedspeak on Monday and amid a prevailing view that the high dollar and low oil price combo will delay the need for the Fed to tighten policy. We still remain EUR-USD bearish, even if Fed tightening remains a tentative proposition. Markets are expecting 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 1.2000, support at 1.1927-30 and 1.1860.

    [USD, JPY]
    A USD-JPY sell-off led broader dollar declines as the currency corrected a chuck of recent gains. Sharp declines in equity markets, and especially an underperformance in the Nikkei 225, which lost over 3% relative to the MSCI Asia Pacific's 1.1% decline, boosted the yen, as per the currency's usual inverse correlation with equity markets during heightened periods of risk aversion. The losses follow the worst day in global equities in 18 months (according to Bloomberg analytics), with market narratives blaming the continued decline in oil prices, which dove under $50 by the NYMEX futures measure, as unsettling markets. USD-JPY dove to a three-week low of 118.65, two big figures down versus Monday's high. EUR-JPY clocked two-month lows. USD-JPY looks set to test 118.00 with the techncal picture looking a little more bearish. The 20-day moving average, presently at 119.38, has turned negative sloping in recent days. Support is marked at 118.00 and 117.65, resistance at 119.38-40 and 120.00.

    [GBP, USD]
    Cable is firmer today amid a generally softer dollar, but we continue to see that the pair remains in a bigger picture bear trend, which has been persisting since the July cycle high at 1.7192 and has accelerated in early new year trade. The sub-expectations manufacturing and construction PMI data for December (the services PMI is due today) and the 1.0% y/y six-year low in UK CPI inflation will have strengthened the dovish voices at the BoE's MPC. Resistance is now marked at 1.5387-1.5400, support at 1.5160-63. The August 2013 low at 1.5102 should be in the crosshairs of bears.

    [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 remains bid despite the broader dollar sell-off. The pair punched out new trend highs above 1.1800 this week as oil prices sank to fresh five-year lows under $50. The August 2009 high at 1.3063 is being talked about as the next big-picture target in markets.

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