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By XE Market Analysis March 25, 2014 4:07 am
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    XE Market Analysis: Europe - Mar 25, 2014

    The euro has consolidated Monday's sharp gain that was seen after the London close. We have heard that the move may have been sparked by a position exit from a long gold, short euro trade following the fairly steep drop in gold prices over the last 10 days, which was possibly put on as a hedge against geopolitical tensions worsening as the situation with the Ukraine worsened. The euro buying had the secondary effect of triggering buy stops. EUR-USD posted a 1.3825-40 range during the pre-London Asia session, after spiking to a peak of 1.3876 during the New York PM following the rally from sub-1.3790 levels. EUR-JPY and EUR-GBP have seen a similar price action. Elsewhere, USD-JPY stuck to a 102.17-35 range during Tokyo trade amid a session lacking fresh leads. Asian stock markets oscillated between gains and losses, while the Nikkei closed with modest losses, following the Wall Street lead after disappointing U.S. PMI data. AUD-USD managed to eke out a new trend peak to 0.9157, breaking above the Mar-18 high of 0.9138 and the 200-day moving average at 0.9141.

    [EUR, USD]
    The euro has consolidated Monday's sharp gain that was seen after the London close. We have that the move may have been sparked by a position exit from a long gold, short euro trade following the fairly steep drop in gold prices over the last 10 days, which was possibly originally put on as a hedge against geopolitical tensions worsening as the situation with the Ukraine worsened. The euro buying had the secondary effect of triggering buy stops. EUR-USD posted a 1.3825-40 range during the pre-London Asia session, after spiking to a peak of 1.3876 during the New York PM following the rally from sub-1.3790 levels. EUR-JPY and EUR-GBP have seen a similar price action. We still prefer a bearish view of 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), while we anticipate the U.S. economy to strengthen in Q2. Resistance is marked at 1.3876 and 1.3900.

    [USD, JPY]
    USD-JPY stuck to a 102.17-35 range during Tokyo trade amid a session lacking fresh leads. Asian stock markets oscillated between gains and losses, while the Nikkei closed with modest losses, following the Wall Street lead after disappointing U.S. PMI data. 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 101.00-101.32, the latter of which marks the position of the 200-day moving average.

    [GBP, USD]
    Cable has consolidated after making a new five-week low of 1.6460 on Monday, which extended what has now been a two-week trend lower. EUR-GBP also gained following a bout of general euro strength on Monday, while GBP-JPY has been consolidating near recent lows. Overall, we can seen that sterling has been somewhat out of favour. We continue to target Cable to 1.6400, with our former long-standing 1.6500 having been met. We would see this as part of a bigger-picture correction after the strong rally phase from July last year to February this year. Fundamentally we anticipate a moderation in the pace of U.K. recovery, while, as we saw last week, the U.S. Fed is remaining on its tapering track.

    [USD, CHF]
    EUR-CHF has recovered to the upper 1.21s. The SNB's decision to leave monetary policy unchanged last week while reaffirming the Swiss franc limit peg against the euro, had no market impact. The CHF has unwound a portion of its safe-haven premium following the placating tone of Russia's Putin earlier last week, though geopolitical tensions remain perky as the U.S. and the EU implements sanctions. The cycle low of 1.2104 has been left unchallenged during the recent risk-off phase. SNB's Jordan earlier in the month 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 consolidated after surging last week through the late January major-trend peak at 1.1224 to make a new cycle high of 1.1278. This reaffirmed the bullish trend that was seen between October and January. Support comes in at 1.1173-75, ahead of 1.1100-15. We target 1.1350. The unexpected show of hawkishness from the U.S. Fed at the recent FOMC contrasts with the dovish stance of the BoC, and has seen yield differentials spike in favour of the U.S. dollar.

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