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By XE Market Analysis March 3, 2014 3:14 am
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    XE Market Analysis: Europe - Mar 03, 2014

    A risk-off theme prevailed on an escalation in geopolitical tension over Ukraine, a test firing of two missiles by North Korea, and a seven-month low in the HSBC-Markit manufacturing PMI for China (48.5 in February after January's 49.5). The official China PMI also came in at an eight-month low of 50.2. The JPY and the CHF outperformed in currency markets, following the usual risk-off pattern, while stocks in Asia dove (MSCI Asia Pacific down 1%), and gold rallied (up 1.7%) along with the U.S. 10-year T-note (cash yield down 5 bp at 2.605%). USD-JPY hit a near four-week low of 101.25, while EUR-JPY dove back below 140.00. BoJ chief, Kuroda, said that the easing policy is having the intended effect. Japan's capex data, which showed a 4.0% gain in headline spending but a 0.3% decline in investment spending, had little market impact. EUR-CHF fell to a fresh cycle low of 1.2104, which is the lowest level seen since June last year. EUR-USD was also lower, dipping to 1.3756 before recovering back to the 1.3790 area, which is fractionally lower than Friday's close. AUD-USD made a one-month low of 0.8890 before recovering to near unchanged levels around 0.8925. Australian February data were mixed, with the AIG manufacturing PMI a weak 48.6, house price index flat, but ANZ job ads up 5.1% m/m.

    [EUR, USD]
    The euro traded weaker today, giving back some of the gains made on Friday following perkier than expected inflation data out of the Eurozone. EUR-JPY and EUR-CHF dropped, driven by a risk-off theme on escalating geopolitical tensions over Ukraine and weak China data, which had the effect of boosting the yen and Swiss franc. EUR-CHF fell to a fresh cycle low of 1.2104, which is the lowest level seen since June last year, while EUR-JPY fell back below 140.00. EUR-USD was dipped to 1.3756 before recovering back to the 1.3790 area, which is fractionally lower than Friday's close. We think the euro's rally last week following the inflation data was an over-reaction as the 0.8% HICP rate outcome is hardly going to change the ECB outlook, and speculation of the central bank making further monetary easing will likely remain. Good selling interest is reported above 1.3800, and it should be noted that there were multiple rejections from 1.38-plus levels over the October to January period.

    [USD, JPY]
    The JPY outperformed in currency markets today following the usual risk-off pattern due to an escalation in geopolitical tension over Ukraine, a test firing of two missiles by North Korea, and a eight-month low in China manufacturing PMI. USD-JPY hit a near four-week low of 101.25, while EUR-JPY dove back below 140.00. BoJ chief, Kuroda, said that the easing policy is having the intended effect. Japan's capex data, which showed a 4.0% gain in headline spending but a 0.3% decline in investment spending, had little market impact. Bigger picture, there still remains muted directional impetus in USD-JPY. BoJ policy would favour continued weakness, but the threat of China slowdown (and now geopolitical tensions), with the associated negative consequences on global stock markets, is an offsetting yen-supportive force. The 102.00 level has now reverted as resistance, ahead of 102.50 and last Friday's three-week peak at 102.83. Support is at 101.00, ahead of major support at 100.00-100.88, the latter of which is the 200-day moving average.

    [GBP, USD]
    Cable has consolidated in the low-to-mid 1.67s after rallying from sub-1.6600 levels last week. The Feb-16 cycle high of 1.6822 is back in scope, though in the bigger picture, trend momentum are indicating a weakening upside impetus. The BoE will not like the recent outperformance of sterling either, and we can expect MPC members to sound out dovish remarks to the effect. The BoE's MPC meets for its March meeting this week, though this should once again be a non-event for markets, at least until the minutes to the meeting are released on Mar-19, as no change in policy is a near certainty and the MPC is not likely to issue a statement. Resistance in Cable is pegged at 1.6768 (Friday's high) ahead of 1.6800-1.6822.

    [USD, CHF]
    The CHF has been underpinned by a risk-off theme that has prevailed on an escalation in geopolitical tension over Ukraine, a test firing of two missiles by North Korea, and an eight-month low in manufacturing PMI for China. EUR-CHF fell to a fresh cycle low of 1.2104, which is the lowest level seen since June last year. We don't advise speculative accounts to hold long CHF exposures below 1.2100 given the threat of SNB intervention ahead of 1.2000. SNB-speak this month reaffirmed its strong commitment to maintaining the 1.20 limit peg, and would only consider removing it if inflation was much higher (CPI has been steady at just 0.1% y/y over the last three months, and the outlook remains benign).

    [USD, CAD]
    USD-CAD looks to be forming a potential double top formation, which is a classic reversal pattern. The pair's capping out just shy of 1.1200 on Feb-21 left the late January major trend peak at 1.1224 unchallenged. There price action has been accompanied by a drop in upside momentum, and together these point to a possible end of the bullish phase that was seen between October and January, implying potential for a sustained retracement or a period of stasis. Near-term support comes in at 1.1040-50, ahead of 1.1020-25.

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