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By XE Market Analysis January 9, 2018 3:17 am
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    XE Market Analysis: Europe - Jan 09, 2018

    The yen spiked on the BoJ announcement of QE tapering, which sent USD-JPY some 70 pips lower to a 112.9 low. EUR-JPY and other yen crosses saw a similar price action. The BoJ announced that purchases of 10- to 25-year JGBs would be trimmed to Y190 bln from Y200 bln, with purchases of debt with maturities of over 25 years to Y80 bln from Y90 bln. The move is seen as a baby step toward normalizing monetary policy in Japan. Given this backdrop, along with ongoing geopolitical risks (North Korea and Iran most prominently at the moment), and risks for a correction in global stock markets, we expect the yen will by a buy on dips. Elsewhere, trading has been mixed. The dollar logged an 11-day high versus the euro, at 1.1951, while losing ground to the Australian and New Zealand dollars, posting near three-month highs versus both. A strong building approvals number out of Australia, which rose 11.7% m/m versus the median forecast for a 1.3% m/m contraction, gave the Aussie a boost.

    [EUR, USD]
    EUR-USD ebbed to an 11-day low of 1.1951. EUR-JPY and EUR-GBP, among other euro crosses have also traded lower. Technically, momentum indicators have been turning bearish over the last week, flagging potential for a sustained correction following the three-week rally phase from levels under 1.1750. Resistance comes in at 1.2019-20, and 1.1983-85. Yesterday's daily close below these levels affirms the shift in directional bias to the downside.

    [USD, JPY]
    The yen spiked on the BoJ announcement of QE tapering, which sent USD-JPY some 70 pips lower to a 112.9 low. EUR-JPY and other yen crosses saw a similar price action. The BoJ announced that purchases of 10- to 25-year JGBs would be trimmed to Y190 bln from Y200 bln, with purchases of debt with maturities of over 25 years to Y80 bln from Y90 bln. The move is seen as a baby step toward normalizing monetary policy in Japan. Given this backdrop, along with ongoing geopolitical risks (North Korea and Iran most prominently at the moment), and risks for a correction in global stock markets, we expect the yen will by a buy on dips. USD-JPY's former trend support at 112.95-98 now reverts as resistance.

    [GBP, USD]
    The pound has been lacking strong domestic leads so far this year. Unexpected weakness in the December manufacturing and construction PMI surveys were offset by a firmer than expected PMI reading for the dominant service sector. The ONS stats office reported an encouraging tick higher in UK productivity today, though to little impact. Brexit-related news or developments, meanwhile, have been thin so soon after the holiday period. Formal negotiations with the EU on a post-Brexit trading relationship are due to start in March. Next week's UK calendar is fairly quiet, highlighted by the private BRC retail sales survey for December (Tuesday) along with November production and trade data (Wednesday). The BoE MPC's next policy meeting will take place on February 7th-8th, where a no change decision is widely anticipated. The BoE will then also publish its latest quarterly inflation report, with updated growth and inflation projections..

    [USD, CHF]
    EUR-CHF has come off the boil somewhat after last week clocking a 36-month high at 1.1778, with the cross since settling to the lower 1.17s. Over the last six months, the franc has seen its biggest weakening, both against the euro and in trade-weighted terms, since the Eurozone crisis took hold back in 2010. The Eurozone has seen political threats diminish, which has been accompanied by steady and assured pickup in growth momentum. This backdrop, along with the enticement of the SNB's -0.75% deposit rate, have seen the franc unwind any vestiges it had of being a safe haven currency. Assuming the Eurozone can continue to conquer political threats, and assuming the SNB remains anchored to ultra-accommodative monetary policy, which looks likely to be the case for the foreseeable (the central bank reaffirmed this commitment at its recent quarterly policy review), we anticipate EUR-CHF will make an eventual return to 1.2000, which was the former floor the central bank maintained until January 2015.

    [USD, CAD]
    USD-CAD has settled to a consolidation near 1.2400 after logging a 13-week low on Friday at 1.2355. The low was seen following a stellar Canadian December jobs report, which outshone the U.S. employment report for the same month. The data cemented market expectations for the BoC to hike rates by 25 bp at its policy meeting next week. USD-CAD has trend resistance at 1.2457-60. Ahead into 2018, how the U.S. dollar benefits from the expected tax overhaul, how oil prices evolve, how NAFTA re-negotiatios go, and how the BoC proceeds with its slow-go tightening cycle will be dominant themes for USD-CAD.

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