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By XE Market Analysis March 18, 2014 4:00 am
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    XE Market Analysis: Europe - Mar 18, 2014

    Another fairy subdued session. USD-JPY eked out a new rebound high of 101.94, but subsequently ebbed lower, toward the mid-101s. EUR-JPY also ebbed back while EUR-USD flat-lined around 1.3903-40. The AUD briefly lifted in the wake of the RBA minutes to the March policy meeting, which said that a stable period of interest rates is likely, backing up Westpac's well flagged decision yesterday to remove its call for the RBA to cut rates in 2014. AUD-USD rose to 0.9109, an eleven-day peak, before retreating to 0.9066. The minutes weren't all bullish as they also noted that the Aussie remains richly valued by historical comparisons. There were no notable data out of Asia today. Asia stocks followed the lead of European and U.S. markets and rallied, which saw the MSCI Asia Pacific gain 0.6% as it recovered from Monday's five-week low. Yesterday's encouraging U.S. factor orders data helped underpin, while markets have taken a perhaps overly sanguine post-Crimea vote view given relations between Russia and the West have worsened to a post-Cold War era low. In China, the offshore yuen rate fell to a 10-month low in the wake of yesterday's implementation of the wider USD-CNY trading band. The 6.20 level is now being approached, a key point as a breach would reportedly trigger significant losses on complex hedging products.

    [EUR, USD]
    EUR-USD flat-lined around 1.3903-40 in Asia before drifting modestly lower into the London open on Tuesday. Yesterday's euro rally looks to have been an "on the fact" type trade, as euro shorts built up ahead of the Crimea referendum squared out post-event. Stocks saw a similar action. It may be wrong to take an overly sanguine post-Crimea vote view given relations between Russia and the West have worsened to a post-Cold War era low. Markets, meanwhile, have so far pretty much ignored last week's remarks from ECB boss Draghi, who made it clear that EUR strength has become a policymaker concern. It should also be noted that outperformance of the euro since early February may have been driven by China reserve building (according to the FT which last week cited market analyst insight). We view EUR-USD as overvalued relative to Eurozone versus U.S. fundamentals, especially with the Fed expected to announce another $10 bln worth of tapering. Resistance comes in at 1.3947 (Monday's high) and 1.3966 (last week's trend peak). We target 1.3800.

    [USD, JPY]
    USD-JPY eked out a new rebound high of 101.94 on Tuesday , but subsequently ebbed lower, toward the mid-101s. EUR-JPY also ebbed back. There were no Japanese data or events of note today. The Nikkei equity index made a 0.9% closing gain, following the lead of European and U.S. markets yesterday. Yesterday's encouraging U.S. factor orders data helped underpin, while markets have taken a perhaps overly sanguine post-Crimea vote view given relations between Russia and the West have worsened to a post-Cold War era low. Bigger picture, there is muted overall directional impetus in USD-JPY within the 100.00-105.00 range. BoJ policy would favour continued yen weakness, but the threat of China slowdown is an offsetting yen-supportive force, via the possible association of negative consequences on global stock markets (given the yen's normal inverse correlation with risk appetite). Support is at 101.00-101.22, the latter of which marks the position of the 200-day moving average.

    [GBP, USD]
    Sterling has settled to a consolidation against both the dollar and the euro in recent days, following a period of underperformance. There are some bank analyst notes in circulation that are recommending a long sterling position into the release of the BoE minutes on Wednesday, as there is a chance we will see some of the members display comparatively upbeat remarks about recovery prospects. We anticipate, however, that these may be offset by expressed concerns about the strength of sterling, an issue touched upon during a press interview by BoE Deputy Governor Bean last week. The central message of the minutes may also stress that the output gaps remains wide and that there should be no rush to tighten policy any quicker than prevailing market expectations for a first hike in Q2 2014. The case for Cable also the Fed's FOMC on the radar, which we expect will announce a further $10 bln worth of tapering, which should be supportive of the dollar. On balance, we are bearish and target 1.6500.

    [USD, CHF]
    EUR-CHF has re-established itself under 1.2200 in recent weeks as geopolitical risk remains over the Ukraine and Crimea has returned support to the safe haven franc. China slowdown concerns are another factor. The recent cycle low of 1.2104 and 1.2100 are key support levels. SNB's Jordan said last week that the central bank would defend the 1.2000 limit if concerns about Ukraine drove the franc higher. We don't advise speculative accounts to hold long CHF exposures below 1.2100 given the threat of SNB intervention ahead of 1.2000. The SNB has signalled that it would only consider removing it if inflation was much higher (CPI dipped back to -0.2% y/y in February).

    [USD, CAD]
    USD-CAD has been oscillating around the 1.1100 level since late February. In the bigger picture, we still think that the pair may be forming a potential topping formation. 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 these developments 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. Support comes in at 1.1000, ahead of 1.0955 (the Mar-7 low).

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