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By XE Market Analysis January 23, 2014 3:05 am
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    XE Market Analysis: Europe - Jan 23, 2014

    A moderate risk-off theme was established in currency markets following the unexpected dive in the flash HSBC-Markit China PMI. The AUD, no surprisingly, underperformed out of the main currencies. AUD-USD dipped to a low of 0.8787, which exactly matched yesterday's low. The JPY edged higher as stocks fell in Asia, as is its usual pattern. USD-JPY had initially seen a peak of 104.84 in early Tokyo session, which was an eight-day high, but subsequently tumbled to levels around 104.30. The safe-haven Swiss currency also firmed, which saw EUR-CHF drop about 30 pips to the 1.2340 region. EUR-USD saw little movement, with trade centred around 1.3550. Of note, was yet another break high in USD-CAD, which smashed through 1.1100 to fresh major trend highs.

    [EUR, USD]
    We continue to expect EUR-USD to trend lower. The ECB is amid its battle against disinflation, and to decouple interest rate expectations in the Eurozone from the U.S. as the Fed starts policy tapering. In contrast, the U.S. Fed may well announce a further tapering in its QE asset purchase schedule at the late January FOMC (WSJ Fedwatcher Hilsenrath argued a reduction to $65 bln a month from the current $75 bln is on the cards). EUR-USD resistance at 1.3580-1.3600, support is at 1.3500.

    [USD, JPY]
    The yen found support amid moderate risk-off theme that was established in currency markets following the unexpected dive in the flash HSBC-Markit China PMI, with the currency edging higher as stocks fell in Asia, as is its usual pattern. USD-JPY had initially seen a peak of 104.84 in early Tokyo session, which was an eight-day high, but subsequently tumbled to levels around 104.30 following the China data. Bigger picture, we continue to expect that USD-JPY's major-trend peak at 105.44 to fall as the BoJ's expansive monetary policy should continue to drive the yen to fresh lows during 2014. Data this month showed Japan's monetary base surged 46.6% y/y in December to a record Y193.5 tln, illustrating the impact that the BoJ's reflationary policy is having. The BoJ is targeting a monetary base to Y270 tln by the end of the year.

    [GBP, USD]
    Sterling has consolidated after surging over 100 pips on the U.K. labour data on Wednesday, with Cable making a peak of 1.6587, the highest level seen since Jan-2, before steadying. EUR-GBP fell to one-year low territory, and looks set for a test of 0.8100. U.K. unemployment unexpectedly dropped to 7.1% in November, contrary to the market expectation for an unchanged 7.3% reading and driven by a solid 288k rise in employment. This marks a 0.6 percentage point drop in the unemployment rate three months -- a much quicker pace of decline than the central bank had projected. At the same time, the minutes to the January BoE MPC showed the Committee acknowledging a quicker than anticipated labour market improvement and that recovery has more momentum than previously thought. We anticipate further EUR-GBP downside. Resistance is pegged at 0.8230, support at 0.8100.

    [USD, CHF]
    The CHF has seen some choppy price action in recent sessions, but overall we expect the currency to remain on a bigger-picture softer footing as a consequence of the unwinding in the Swiss currency's safe haven premium as the period of Fed policy uncertainty ended with its decision to commence QE tapering. Resistance comes in at 1.2400, support at 1.2320 and 1.2300.

    [USD, CAD]
    USD-CAD smashed through 1.1100 to fresh major trend highs during the Asia session on Thursday. This follows the dovish statement from the BoC yesterday, while weak China PMI data brought pressure to the dollar bloc currencies. Bigger picture, USD-CAD has broken sharply higher over the last month, driven by weaker Canadian data and the consequent underpinning of favourable yield differential movement. The pair broke 1.0700-1.0900, and now 1.09-1.10. The price action marks a break higher after some pretty choppy price action over the last several of weeks. Resistance can now be expected at 1.1150, support at 1.1050.

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