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By XE Market Analysis May 19, 2014 3:06 am
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    XE Market Analysis: Europe - May 19, 2014

    The yen posted gains during the PM session in Tokyo amid a developing risk aversion theme as weak house price data out of China fed slowdown concerns in Asia's biggest economy. The Nikkei stock index was showing a 0.6% decline in late session, while Australia's ASX 200 closed 1.2% for the worse, while the broad MSCI Asia Pacific index was indicated with a 0.4% decline. Unexpected strength in machine orders data out of Japan were overlooked. China house prices slowed to an 11-month low rate of +6.7% y/y in April, down from 7.7% in March. USD-JPY dove to a low of 101.26, a new two-month low. EUR-JPY and other yen crosses were also lower as the yen followed its usual inverse correlation with risk appetite. The AUD also weakened against most other currencies as Australian stock markets underperformed and with industrial resources prices declining. Iron ore futures fell below $100 for the first time since 2013. AUD-USD dipped to the 0.9350 area. Elsewhere, EUR-USD trade was pretty quiet, lifting back above 1.3700.

    [EUR, USD]
    EUR-USD price remains distinctly bearish, with there being a lack of substantive rebounds in the wake of ECB-initiated decline that commenced last Thursday, with lower lows continuing to be seen. We concur with a UBS research note of last week, which argued that EUR-USD will fall to sub-1.3400 levels over the coming weeks based on forecasts for May Eurozone CPI and the May U.S. payrolls report, along with ECB action at its June policy meeting.

    [USD, JPY]
    The yen rose to a fresh two-month high versus the dollar Monday amid a developing risk-aversion theme as weak house price data out of China fed slowdown concerns in Asia's biggest economy. The Nikkei stock index was showing a 0.6% decline in late session, while the broad MSCI Asia Pacific index was indicated with a 0.4% decline. Unexpected strength in machine orders data out of Japan were overlooked. China house prices slowed to an 11-month low rate of +6.7% y/y in April, down from 7.7% in March. USD-JPY dove to a low of 101.26, a new two-month low. EUR-JPY and other yen crosses were also lower as the yen followed its usual inverse correlation with risk appetite. Bigger picture, USD-JPY still remains entrenched amid a broad sideways range, roughly contained within 100.00-105.00, which has been in place since early January. This stasis may persist for some time, though technical analysts will be marking this as a potential topping formation after the steep rally from levels around 75.0 that was seen during the second part of last year.

    [GBP, USD]
    Last week's disappointing labour market report and more especially the BoE May Inflation Report, which unexpectedly left GDP and CPI projections largely unchanged while signalling that there remains no rush to hike interest rates, were game changes for sterling. The market had clearly got ahead of itself with regard to BoE tightening expectations. While the labour report wasn't exactly bad, with unemployment dipping to a new cycle low of 6.8% from 6.9%, the claimant data pointed to a slackening in the pace of decline while average income data unexpected dipped to 1.3% y/y, below CPI inflation, which is 1.6%. This backs up BoE arguments that there remains a good degree of slack in the economy. We look for Cable to revisit 1.6700 and below, though we don't anticipate too much potential for sustained losses below 1.6500.

    [USD, CHF]
    EUR-CHF has settled around the 1.2210-15 region. The cross recently recovered from a recent foray to the mid-121s. The cycle low of 1.2104 and 1.2100 are key support levels. The threat of SNB intervention into its 1.2000 limit peg is helping to deter franc buying to some extent. SNB's Jordan repeated recently that the central bank remains committed to defending the currency cap.

    [USD, CAD]
    USD-CAD settled in the mid 1.08s. The pair has been in a correction/consolidation phase since late January following a four-month rally period from sub-0.9700 levels, but a moderate bear trend seems to be emerging. The still-dovish outlook for BoC policy, however, seems to be putting a limit on the CAD's upside. We expect a choppy, sideways bias in USD-CAD.

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