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By XE Market Analysis March 13, 2015 3:22 am
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    XE Market Analysis: Europe - Mar 13, 2015

    EUR-USD dipped back under 1.0600 in Asia. Yesterday's rebound peak at 1.0663 was short of the previous day's high at 1.0717, suggesting that the trend remains bearish (according to Down theory guidelines on trends), especially as a new low at 1.0494 was also seen. USD-JPY recovered to 121.57 in Tokyo, 10 pips shy of yesterday's peak. A solid rebound in the Nikkei 225, up 1.8% and trading above the 19,000 level for the first time since 2000, helped the pairing higher, as per the usual inverse correlation the yen has with stock market direction. EUR-JPY, meanwhile, has steadied in the upper 128s after making a 21-month low at 127.62 yesterday. Sterling is under the cosh after BoE Governor Carney yesterday spoke of the "protracted effects of sterling's strength," and Cable's 2013 low at 1.4811 now looks likely to be challenged.

    [EUR, USD]
    EUR-USD dipped back under 1.0600 in Asia. Yesterday's rebound peak at 1.0663 was short of the previous day's high at 1.0717, suggesting that the trend remains bearish (according to Down theory guidelines on trends), especially as a new low at 1.0494 was also seen. Remarks on Thursday from ECB's Coeure that QE could be extended beyond September 2016, if needed, keep euro bears in the game though there remains some debate about how far the euro can fall. A Citigroup research note, circulated earlier in the week, pithily observed that if EUR-USD continues to fall at the average rate of decline seen over the last couple of weeks (which is 56 pips per day), the pair will reach zero by Jul-22. For now, however, we're sticking to our forecast for parity. With the ECB having bought EUR 9.8bln worth of debt in the first three days of the QE program, and with plenty more on the way, the euro is likely to remain on a secular downward path. Key EUR-USD resistance is at 1.0693-95 and 1.0700.

    [USD, JPY]
    USD-JPY recovered to 121.57 in Tokyo, 10 pips shy of yesterday's peak. A solid rebound in the Nikkei 225, up 1.8% and trading above the 19,000 level for the first time since 2000, helped the pairing higher, as per the usual inverse correlation the yen has with stock market direction. A seven-and-a-half year peak was logged at 122.03 earlier in the week, though upside momentum has subsequently ebbed. Yesterday's low at 120.65 left unchallenged support is at 120.47-50 (which encompasses former daily highs from mid-February). EUR-JPY, meanwhile, has steadied in the upper 128s after making a 21-month low at 127.62 yesterday. We still think there may be more to come with regard to the secular euro downtrend as a consequence of ECB money printing, which may well see the currency overshoot to the downside. Trend support drawn from last April lows through to late January lows projects scope for a move to the 125.25 area.

    [GBP, USD]
    Sterling took a whack after BoE Governor Carney yesterday spoke of the "protracted effects of sterling's strength." He said "there is a risk that the combination of persistently low global inflation and the strength of sterling could weigh on prices here for some time." This propelled Cable under 1.4900 and EUR-GBP above 0.7100. Carney balanced his remarks by arguing that the fall in inflation recently is "in large part down to falling energy prices, " and that this "is not generalised deflation proper" and "there is little evidence of a deflationary mindset setting in." However, BoE displeasure at sterling strength, which is trading at multi-year highs in trade-weighted terms, will weaken expectations for a rate hike as soon as August. Cable's 2013 low at 1.4811 now looks likely to be challenged. Resistance is at 1.4993-1.4900. The 2010 low was at 1.4249, for reference, though we would think that sterling would be looking undervalued at anything much below prevailing levels given the robust recovery of the UK economy.

    [USD, CHF]
    EUR-CHF is establishing a lower trading range after breaking free from the former orbit around the 1.0700 level amid general euro underperformance. The alleged "soft floor" of the SNB at 1.0500 is back in scope, though some market analysts (notably at UBS) contest the existence of this given the SNB's damaged credibility after failing to stop the tide at the former 1.2000 floor. The risks are skewed for more euro losses as the ECB QE program gets under way, which will likely test the resolve of the central bank. The SNB could respond by cutting interest rates deeper into negative territory, and perhaps pursue a tactical currency intervention policy aimed at keeping the market two-sided rather than trend halting, per se. In extreme circumstances capital controls would be an option, though this looks unlikely.

    [USD, CAD]
    USD-CAD has settled around 1.2700 after choppy trade this week. The pair on Wednesday came within one pip of the cycle high at 1.2799, which is a key resistance level ahead of the August 2009 high at 1.3063. Softer oil prices have weighed on the Loonie this week just as last week's solid U.S. jobs report has boosting the USD's yield advantage as the Treasury market anticipates a mid-2015 Fed rate hike. Canada's February jobs report will be released today, which we expect to paint a less-rosy picture than in the case south of the border, forecasting a modest 5.0k rise in the headline and unchanged unemployment of 6.6%.

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