Home > XE Currency Blog > XE Market Analysis: Europe - Mar 19, 2014

AD

XE Currency Blog

Topics7905 Posts7950
By XE Market Analysis March 19, 2014 4:01 am
    XE Market Analysis's picture
    XE Market Analysis Posts: 5829
    XE Market Analysis: Europe - Mar 19, 2014

    The CNY made fresh lows while the USD majors posted inside ranges in uneventful trade as market participants sat on their collective hands ahead of the FOMC. The yuan dropped below 6.2000 for the first time since last April after the PBoC cut the reference rate to 6.1351, with the currency trading just over 1% below here, the biggest gap since 2007 (after the PBoC doubled the maximum daily trading band to 2% this week). The low coincided with a report in the China Securities Journal that said the steel sector in China is seeing its worst Q1 since 2000. Elsewhere, USD-JPY posted a 101.30-63 range and EUR-JPY a 141.05-48 range. Japanese trade balance for February disappointed at -Y800.3 bln (-Y 600.0 bln had been the median forecast), while the March Reuters Tankan report for Japan manufacturers came at +18 in March, unchanged from February, and the All Industry Activity Index came in at +1.0% m/m in Jan. AUD-USD consolidated in the low 0.91s after rallying quick strongly yesterday. EUR-USD made time in the low 1.39s.

    [EUR, USD]
    EUR-USD has returned to familiar territory around the low 1.39s after recent Crimea news related chop. Markets 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, which increases the odds of easing measures over the coming months. It should 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 later on Wed 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 posted a 101.30-63 range and EUR-JPY a 141.05-48 one during the Tokyo session, with both remaining well within ranges seen yesterday. Stocks in Asia also lacked strong direction. Japanese trade balance for February disappointed at -Y800.3 bln (-Y 600.0 bln had been the median forecast), while the March Reuters Tankan report for Japan manufacturers came at +18 in March, unchanged from February, and the All Industry Activity Index came in at +1.0% m/m in Jan. Bigger picture, USD-JPY looks stuck within a 100.00-105.00 band. 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 101.00-101.23, the latter of which marks the position of the 200-day moving average.

    [GBP, USD]
    Cable hit a one-month low of 1.6546 and has since settled around the 1.6600 area. EUR-GBP hit a three-month high of 0.8400. We think the weakness sterling has been seeing is justified and continue to target 1.6500 in Cable. The central message of the BoE minutes today is likely to be that the output gap remains wide and that there should be no rush to tighten policy any quicker than prevailing market expectations for a first hike in Q2 2015. The case for Cable also has 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.

    [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).

    Paste link in email or IM