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By XE Market Analysis March 27, 2014 3:39 am
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    XE Market Analysis: Europe - Mar 27, 2014

    USD-JPY was the main mover in an otherwise fairly featureless session in pre-London trade in Asia. The pair extended lower, triggering stops through 101.90-102.00 to log an eight-day low of 101.72 before rebounding to 102.20-plus levels. Market commentaries we have seen report that a rally in Japanese stocks inspired the yen's decline. The Nikkei rallied just over 1%, outperforming an other mixed session on Asian bourses. EUR-JPY and other yen crosses saw a similar price action to USD-JPY. EUR-USD, meanwhile, flat-lined around 1.3780-90. The in-favour AUD-USD remain buoyant, recovering from a shallow dip to 0.9215 before recovering to within a whisker of yesterday's four-month peak of 0.9245. In news, U.S. Fed's Bullard delivered s speech from Hong Kong, where he remarked that that policymakers would have to take care that an asset bubble doesn't form as a consequence of loose monetary policy and the slow course of policy normalization. Germany's Schaeuble said that consequences stemming from sanctions against Russia will be manageable for Germany. Data out of China showed that industrial profits growth slowed further in January and February, which tallies with recent data showing slowing economic growth.

    [EUR, USD]
    The euro has consolidated in around 1.3800 after some whippy price action this week. 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 triggered stops through 101.90-102.00 to log an eight-day low of 101.72 before rebounding to 102.20-plus levels. Market commentaries we have seen report that a rally in Japanese stocks inspired the yen's decline. The Nikkei rallied just over 1%, outperforming an other mixed session on Asian bourses. EUR-JPY and other yen crosses saw a similar price action to USD-JPY. More generally, USD-JPY looks stuck within a 100.00-105.00 band. The BoJ's aggressive reflation 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 and 101.34, the latter of which marks the position of the 200-day moving average.

    [GBP, USD]
    Cable made a new high for the week at 1.6591. The pound has also been perky against the euro. Sterling was given a lift earlier in the week after upbeat remarks from BoE MPC member Weale, who said that wage growth is picking up and that, "my sense is things are going quite well." Technically, we have a congestion of moving averages and former pivot levels (which mark former daily lows and/or highs) above 1.6600 and through 1.6625, so market participants will be looking at this area as a key resistance zone. We had been targeting Cable to 1.6400, but we're less certain now as there doesn't appear to be enough divergence between BoE and Fed policy courses, with both heading for a rate hike in mid-2015. One difference is that the Fed is continuing QE asset purchases, albeit at a tapered rate, while the BoE's QE expansion has long since come to a halt, so this would appear to be Cable positive.

    [USD, CHF]
    EUR-CHF has steadied back toward the 1.2200 level after making a one-month peak of 1.2234 on Wednesday. The up move reflected further unwinding of the Swiss franc's safe-haven premium. The cycle low of 1.2104 was left unchallenged during the recent risk-off phase. We see potential for a recovery to the 1.2300-1.2400 area, but this assumes there are no renewed flare-ups in geopolitical tensions. The 1.2200 is now marked as a support level. 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 settled lower 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 1.1050. We have been targeting 1.1350, though more tentatively now and would need to see 1.1100 hold on a weekly closing basis. The unexpected show of hawkishness from the U.S. Fed at the recent FOMC contrasted with the dovish stance of the BoC, and has seen yield differentials move in favour of the U.S. dollar.

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