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By XE Market Analysis March 31, 2014 3:13 am
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    XE Market Analysis: Europe - Mar 31, 2014

    Lots of news but little market movement among the dollar majors today in pre-London Asian trade. EUR-USD has been hovering around the 1.3750 area, and USD-JPY has been flat-lining around 102.80-90. The AUD dipped to its lowest level against the USD since last Wednesday, making a low of 0.9218, which is about 30 pips down on last week's New York closing level. There was no fresh development that sparked the move, which was rather a case of a "normal" correction after a period of steep gains that culminated last Wednesday in a four-month peak of 0.9295. The euro didn't react to news that ECB's Weidmann said that the central bank should only react to low inflation in the event of second-round effects. The yen and Japanese asset markets were unperturbed by be an unexpected 2.3% m/m drop in February industrial production, which was partly blamed on bad weather. Stock markets in Asia rallied, with the MSCI Asia Pacific making a 0.5% gain. Russia's foreign minister, Lavrov, said that says Moscow has no intention of crossing Ukraine's border after meeting with U.S. Secretary of State Kerry.

    [EUR, USD]
    EUR-USD settled around the 1.3750 area after making a one-month low of 1.3705 on Friday. ECB's Weidmann said that the central bank should only react to low inflation in the event of second-round effects, which for market participants seemed to downplay his remarks from last week that unconventional easing measures are being considered. Yield differentials have been moving out of the euro's favour, and the EUR-USD market now "feels" bearish as it has been reacting promptly to any negative leads. We have been advocating a bearish view of EUR-USD as the ECB is likely to remain in dovish mode for sometime yet, while we anticipate the U.S. economy to strengthen in Q2 and the Fed is already signalling rate hikes in 2015. We target 1.3500.

    [USD, JPY]
    USD-JPY flat-lined around 102.80-90 during Tokyo trade. The yen and Japanese asset markets were unperturbed by be an unexpected 2.3% m/m drop in February industrial production, which was partly blamed on bad weather. USD-JPY looks stuck within a 100.00-105.00 band in the bigger picture. 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). Key support is at 101.00 and 101.36, the latter of which marks the position of the 200-day moving average.

    [GBP, USD]
    There has been a sea change in sentiment for sterling over the last week. Incoming data have shown that economic recovery remains robust and we have had some relatively hawkish BoE-speak. The central bank's FPC (unit responsible for financial stability) said that it is "vigilant to emerging vulnerabilities," highlighting property market risks. Overall, the evident durability of the U.K. recovery, aided by a pick-up in conditions on the continent and recovering health in the banking sector, has underpinned sterling despite some recent protestations from some policymakers about the high level of the pound. We anticipate EUR-GBP will re-test the 0.8200 level and the Feb-16 low of 0.8157 over the coming weeks. We would also suggest sterling bulls consider GBP-JPY.

    [USD, CHF]
    EUR-CHF has drifted lower after making a one-month peak of 1.2234 on Wednesday. The up move had 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 broken below some key support levels over the last week, on route to a three-week low within a whisker of 1.1000. The strength in the Canadian dollar tallies with notably gains that have been seen in the AUD and NZD currencies. This in turn reflects a shift to a less pessimistic global outlook (to which the dollar-bloc currencies are sensitive to) than we saw recently with regard to the China slowdown theme (now offset by expectations of stimulus), and the threat from the geopolitical situation between Russia and the West. USD-CAD's mid-March surge to new cycle high of 1.1278 now looks to have been what technical analysts would call a false breakout. We don't advise getting too carried away with a bearish USD-CAD view as the Fed vs BoC stance remains supportive. Key supports are pegged at 1.0955 (the Mar-6 low) and 1.0910 (the Feb-19 low).

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