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By XE Market Analysis March 5, 2014 2:46 am
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    XE Market Analysis: Europe - Mar 05, 2014

    The AUD saw some chop in otherwise steady-with-narrow-ranges for the main currencies during pre-European trading in Asia. Wall Street closed with a solid gain Tuesday and the MSCI Asia Pacific equity index built on yesterday's recovery gains, showing a 0.8% gain at the time of writing, still reflecting the abatement in geo-political concerns over the Ukraine situation. This backdrop helped USD-JPY eke out a fresh rebound high of 102.29, but there was little follow-through and a bunch of corporate selling in Tokyo. The low was 102.11. EUR-USD made time in the low-to-mid 1.37s, which is very familiar territory now as the pair has spent most of the time on a 1.37 handle since mid-February. EUR-CHF nudged out a new rebound high of 1.2195, but the market lacked the muster for a test of 1.2200 and the cross ebbed back slightly. AUD-USD put in a 40 pip spurt to a high of 0.8997 only to subsequently dive to 0.8936 and then settle at near net unchanged levels around 0.8950-60. The pop higher was prompted by Australian Q4 GDP, which came in above expectations at +0.8% q/q and 2.8% y/y, and Australia services PMI, which sprang to 55.2 in February after January's 49.3. Large selling interest into 0.9000 accounted for the correction in the AUD.

    [EUR, USD]
    EUR-USD has continued to tread water in the low-to-mid 1.37s, which is very familiar territory now as the pair has spent most of the time on a 1.37 handle since mid-February. EUR-CHF nudged out a new rebound high of 1.2195, but the market lacked the muster for a test of 1.2200 and the cross ebbed back slightly. EUR-JPY logged a rebound high of 104.58. The moves in EUR-JPY and EUR-CHF reflect a continued unwind of risk-off positioning as markets adjust to the abatement in geo-political tensions over the Ukraine crisis. As for EUR-USD, we continue to 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 (we think a move to leave SMP asset returns unsterilized is most likely). We also see that the U.S. Fed will remain on its tapering of QE course. 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 abatement in geo-political concerns over the Ukraine situation has continued to support stock markets on Wednesday and this backdrop helped USD-JPY eke out a fresh rebound high of 102.29. However, there was little follow-through and a bunch of corporate selling in Tokyo. The low was 102.11, so a narrow range today in Tokyo. There remains muted overall directional impetus in USD-JPY. BoJ policy would favour continued weakness, but the threat of China slowdown (and lingering geopolitical risk), with the associated negative consequences on global stock markets, is an offsetting yen-supportive force. Resistance is marked at 102.50 and last Friday's three-week peak at 102.83. Support is at 101.00, ahead of major support at 100.00-100.90, the latter of which is the 200-day moving average.

    [GBP, USD]
    We remain wary about the sustainability of GBP-USD's rally that's been in place since last July, while EUR-GBP looks to be building a base above 0.8200 level. A key support zone is in EUR-GBP given by 0.8157-0.8200, a region that has marked a series of daily lows since mid-January. Resistance in Cable is pegged at 1.6700 and 1.6768 (Friday's high), ahead of 1.6800-1.6822. From a fundamental perspective, the recent phase of above-trend U.K. growth is likely to moderate, partly due to the rich levels of sterling, which was flagged by a weak export orders figure in the February manufacturing report. The BoE has already highlighted sterling as a concern, and we can expect MPC members to sound out dovish remarks to the effect. Meanwhile, on the USD side of the equation, we see the U.S. economy remaining on a recovery path and the Fed continuing to taper QE assets. 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.

    [USD, CHF]
    EUR-CHF nudged out a new rebound high of 1.2195, but the market lacked the muster for a test of 1.2200 and the cross ebbed back slightly. The new high reflected a continued unwind of risk-off positioning as markets adjust to the abatement in geo-political tensions over the Ukraine crisis. There is now some distance from the fresh cycle low of 1.2104 that was seen on Monday, 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. This price action has been accompanied by a drop in upside momentum, and together point to a possible end of the bullish phase that was seen between October and January, in turn 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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