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By XE Market Analysis January 27, 2014 3:09 am
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    XE Market Analysis: Europe - Jan 27, 2014

    The stock market rout continued in Asia but the main currencies were not far from net unchanged levels in pre-European trade. There was some chop early in the session, ahead of the Tokyo open, which saw USD-JPY dive to a new cycle low of 101.76. The pair subsequently settled around 102.50, near the closing level seen in London on Friday. EUR-JPY saw the same price action. EUR-USD posted a narrow range around 1.3680-90. AUD-USD managed to find a toehold after the sharp across-the-board declines it saw last week, edging to the 0.8720-30 area after opening at sub-0.87 levels. There were was flood of remarks out of Davos at the weekend, though none seemed to have much market, and the IMF also said that it was watching emerging markets very closely. Highlights include: BoE's Carney affirming that, "I am not signalling an exit of UK monetary policy here just to be clear;" Former MPC hawk Sentance calling for rate rises "sooner rather than later;" ECB Draghi reaffirming that interest rates will remain low or lower for an extended period; and BoJ's Kuroda forecasting that, "inflation should hit the Bank of Japan's target of 2% within two years."

    [EUR, USD]
    EUR-USD has consolidated around the 1.3700 market after jumping from the mid-1.35s late last week as the dollar came under some pressure as the emerging market led bout of risk aversion took hold. At the same time the EUR lost ground to the JPY and CHF, currencies that tend to outperform during risk-off periods. We'll have to stock market turmoil pans out, a backdrop that may keep EUR-USD underpinned, but the Eurozone fundamental picture is euro bearish. ECB Draghi reaffirmed from Davos that that interest rates will remain low or lower for an extended period, while the IMF reminded us that Eurozone inflation is "way below target" (in the wards of the Fund's boss, Lagarde), and that inflation is a real risk. We mark resistance at the Jan-2 high of 1.3758. Support at 1.3650 and 1.3623-25.

    [USD, JPY]
    There was some chop early in the session ahead of the Tokyo open, which saw USD-JPY dive to a new cycle low of 101.76. The pair subsequently settled around 102.50, near the closing level seen in London on Friday. EUR-JPY saw the same price action. The technical picture remains bearish for USD-JPY, with last week's price action seeing both the 50- and 100-day moving averages breached along with the completion of a head and should reversal formation, which targets 101.20. BoJ's Kuroda said over the weekend that "inflation should hit the Bank of Japan's target of 2% within two years," which implies continued easy monetary policy, though fundamentals aren't a factor at the moment and the yen's fortunes will remain dependant on how the prevailing risk-off theme evolves. More of the same would likely see the currency outperform for two reasons. One, the currency has been a favoured funding currency, and asset market routs tend to prompt these short positions to unwind as investors stampede for the exits. Two, the drop in risk appetite tends to see Japanese investors repatriate some of their foreign held assets.

    [GBP, USD]
    Cable settled today near 1.6500 after volatile trade in recent sessions, U-turning lower Friday after rallying above 1.6650, meeting solid selling in the 1.6660-70 area and subsequently dropping below 1.6600 following dovish BoE-speak. Overall, we are bearish on sterling, though more so against the EUR, CHF and JPY than the USD for as long as the backdrop of risk-off persists. BoE's Carney said from Davos a the weekend that, "I am not signalling an exit of UK monetary policy here just to be clear." The recent sharp drop in the U.K. unemployment rate to 7.1% brought the bank's self-prescribed 7.0% target to within a whisker's reach, but Carney last week said that other factors will be taken into account with regard to monetary policy, which we know from the bank's forward policy framework are inflation and financial stability criteria. BoE member Fisher also downplayed the drop in jobless as average pay remains negative and inflation pressures are declining. Last month CPI fell to the BoE's mandated 2.0% target for the first time since 2009.

    [USD, CHF]
    The meltdown in risk taking appetite has seen the CHF rally sharply this week, as China and EM concerns grip the markets. Safe-haven flows will likely continue to buoy the CHF until things settle down a bit. The FX market will be wary pushing EUR-CHF too far under 1.2200 however, as sustained downward movement will likely illicit a response from the SNB.

    [USD, CAD]
    USD-CAD has dropped back under 1.1100 and has looked heavy on moves into 1.1100. Given the sharp gains seen over the last week, profit taking shouldn't have been too much of a surprise, though following a period of consolidation further gains could be in the cards. The risk outlook has shifted negatively, which if ongoing could continue to weigh on the CAD, along with the BoC's more dovish shift.

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