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By XE Market Analysis May 7, 2015 3:08 am
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    XE Market Analysis: Europe - May 07, 2015

    EUR-USD remains well bid, nudging out a new 10-week peak at 1.1371. EUR-JPY also traded to a new four-month peak, while the euro also managed to perk up against the recently outperforming Aussie. Generally encouraging signs of improving growth in the Eurozone are feeding a market narrative that the ECB may become less committed to its current QE program, and could eventually consider an tapering of the program. This is offsetting the spectre of a continued lack of breakthrough in bailout negotiations between Greece and its creditors. EUR-USD, meanwhile, has the added prop of a narrowing dollar yield advantage over the euro following a run of soft U.S. data. USD-JPY has slumped back to familiar levels in the mid-119s. Sterling is lower today against both the dollar and euro as UK election day dawns. AUD-USD rebounded to the 0.7980-0.8000 area after a dip to 0.7923 following an unexpected decline in Australian employment figures. A surge in iron ore prices above $60 following a near 30% rally since early April have been underpinning the Aussie. The currency's yield advantage against the greenback has also widened.

    [EUR, USD]
    EUR-USD remains well bid, nudging out a new 10-week peak at 1.1371. EUR-JPY also traded to a new four-month peak, while the euro also managed to perk up against the recently outperforming Aussie. Generally encouraging signs of improving growth in the Eurozone are feeding a market narrative that the ECB may become less committed to its current QE program, and could eventually consider an tapering of the program. This is offsetting the spectre of a continued lack of breakthrough in bailout negotiations between Greece and its creditors. EUR-USD, meanwhile, has the added prop of a narrowing dollar yield advantage over the euro, which has narrowed to the 162 bp area at the 10-year T-note versus Bund comparison, down from 165 bp yesterday and from the 175 bp area last week. We continue to advise caution as Friday's U.S. jobs report for April is likely to show a rebound from unexpected weakness in March.

    [USD, JPY]
    USD-JPY has slumped back to familiar levels in the mid-119s, driven by dollar underperformance. EUR-JPY, meanwhile, edged out a new four-month peak, and the yen has also seen weakness against the dollar bloc currencies. The yen has been trading with a broadly soft bias since the BoJ last week lowered its inflation and growth forecasts for both the current and next fiscal years in its updated median-term projections. The revised forecasts will keep open the possibility of the BoJ making further stimulus later in the year. USD-JPY support is 119.20 and 119.00. Bigger picture, the pair is trending sideways, having orbited the 120.00 level since December. We expect an eventual breakout to the topside as the U.S. economy recovers traction following its Q1 soft patch.

    [GBP, USD]
    Sterling is lower today against both the dollar and euro as UK election day dawns. Pre-election polls have been remarkably consistent, putting the right-leaning Conservative Party in the lead, but with support well short of an outright majority, leaving a good possibility that a left-leaning Labour-SNP (Scottish National Party) coalition government will form. The SNP wants this, and while Labour has not so far made any hint of commitment, it will presumably not want too see a minority Conservative government take up the reigns. There are a lot of uncertainties, but one thing is for sure is that this will be a ground breaking election, and the weeks ahead look set to be politically chaotic by UK standards. We expect sterling will be affected by this, and anticipate Cable will see sub-1.5000 levels again before long.

    [USD, CHF]
    EUR-CHF has ebbed back under 1.0400 after making a one-month high at 1.0508 last week, as there remains little sings of breakthrough in Greek negotiations with its creditors. The SNB is amid an ongoing fight to curtail EUR-CHF's downside. The central bank last month expanded the number of groups subject to negative rates on deposits at the central bank in a fresh effort to curtail demand for the franc. The SNB said at its March policy review that the franc is "significantly overvalued," and would "remain active in the foreign exchange market, as necessary." SNB Chairman Jordan said more recently that "we will remain active in the foreign exchange market as necessary in order to influence monetary conditions."

    [USD, CAD]
    USD-CAD set a new three-month low at 1.1940 on Wednesday. Broader dollar weakness and dollar bloc outperformance has been driving. Higher oil prices and a solid Ivey PMI data yesterday have been specific supports of the loonie. Bigger picture, the fall in USD-CAD from levels above 1.2700 during the mid-to-latter part of April is technically significant as it smashed the series of range lows established over the last four months in the 1.2351 to 1.2400 region. These levels now revert as strong resistance markers, and the overall bias is likely to remain lower. A big-picture support region at 1.1950-1.2000 remains in play, yet to be broken decisively.

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