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By XE Market Analysis March 21, 2014 4:03 am
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    XE Market Analysis: Europe - Mar 21, 2014

    Narrow ranges prevailed among the main currencies in a session that was quieted by the absence of Japan, which was out for the Vernal Equinox holiday. The PBoC set the USD-CNY reference rate at 6.1475, below Thursday's fixing of 6.1460, though the pair hit 6.2370, which was the weakest the yuan has traded at since Feb-25 last year. The yuan is set to post its biggest weekly loss on record, which coincides with the introduction this week of the widening in the permitted daily trading range to 2% from 1% previously. USD-JPY, meanwhile, made something near to a horizontal line around 102.40, with the range not more than 13 pips. EUR-USD was equally featureless, hovering around 1.3780-90. AUD-USD managed to eke out a two-day peak of 0.9071, which is about a 30 pip gain on yesterday's London closing level, even though Australia's January Conference Board leading index fell to +0.2% from +0.8% in December.

    [EUR, USD]
    EUR-USD hovered around 1.3780-90 during a quiet Asia session. This marks a consolidation after the sharp drop of the last two days, which was driven by a dollar rally after Fed boss Yellen signalled that that a rate hike is likely by mid-2015. EUR-USD left a two-week low of 1.3749, which now marks interim support. Our target of 1.3800 was met, but we continue to see a flat-to-lower path for EUR-USD as the ECB is likely to remain in dovish mode for sometime yet given the deflation threat and concerns about euro strength (as pointed to by Draghi last week). Near-term resistance is marked at 1.3800, ahead of 1.3845.

    [USD, JPY]
    USD-JPY made something near to a horizontal line around 102.40 during Asian trade, with the range not more than 13 pips. The session was quieted by the absence of Japan, which was out for the Vernal Equinox holiday. USD-JPY left a peak of 102.68 in the wake of the post-FOMC dollar rally. In the 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 101.00-101.27, the latter of which marks the position of the 200-day moving average.

    [GBP, USD]
    Cable made a five-week low of 1.6480 on Thursday, in the wake of the Fed's unexpected rate hike signal, which saw the dollar rally. The pound, meanwhile, firmed against the euro, recovering some recently lost ground. The latest CBI industrial trends survey highlighted an area of concern for U.K. policymakers as the export orders balance dropped to -10 from -1 in February. Export orders can be volatile month-to-month, but the data nevertheless highlights the fact that recovery has been too much fuelled by rising consumption and not enough by trade. This issue also links with the minutes to the BoE MPC's March meeting, which showed that MPC members are concerned by the high level of the pound. We anticipate further declines in Cable, targeting 1.6400. Initial resistance is marked at 1.6540.

    [USD, CHF]
    EUR-CHF failed to hold gains back above 1.2200 and has settled back to familiar levels in the mid-to-upper 1.21s. The SNB's decision to leave monetary policy unchanged and the Swiss franc limit peg against the euro in place had no market impact. The CHF has unwound a portion of its safe-haven premium following the placating tone of Russia's Putin earlier in the week, which saw geopolitical tensions over Crimea recede. The cycle low of 1.2104 was left unchallenged during the recent risk-off phase. SNB's Jordan had 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 surged this week, above the late January major trend peak at 1.1224 to make a new cycle high of 1.1278 so far. This reaffirms the bullish trend that was seen between October and January. Support comes in at 1.1200-1225, ahead of 1.1100-15. We target 1.1350. The unexpected show of hawkishness from the U.S. Fed, which contrasts with the dovish stance of the BoC, has seen yield differentials spike in favour of the U.S. dollar.

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