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By XE Market Analysis November 13, 2013 1:46 am
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    XE Market Analysis: Europe - Nov 13, 2013

    FX Trade was fairly light in Asia. The dollar maintained easier levels following Tuesday's moderate correction and stocks also headed lower on profit taking. EUR consolidated close to 1.3450 following the short covering rally on Tuesday, though the balance of risk is still with lower levels. USD-JPY edged through 99.50 after 100.00 barriers put a top in place, though large dollar longs are still positioned for an eventual break higher. There was no reaction after Japan core machinery orders fell -2.1% m/m, which was weaker than expected. AUD tried to move higher after yesterday's tumble to 0.9268 lows over the London close. It got positive guidance from a rise in Westpac/MI consumer confidence to 110.3 in November. However, the Q3 wage price index rose at a slower than expected 0.5% sa from 0.7% forecast. Meanwhile, China's Third Plenum ended with a communique that was short on details. It indicated that it would pursue economic reform, reduce investment restrictions, give more rights to farmers and close the wealth gap, but did not lay out plans on how this would be achieved.

    [EUR, USD]
    EUR-USD traded close to 1.3450 throughout the Asia session after Tuesday's short covering rally boosted the pair from 1.3360 to 1.3455. Near-term resistance at 1.3450-60, which represents the post-ECB bounce highs, capped gains. Stops should be a factor over the level, and a break could see 1.3500 targeted again. Comments from ECB officials since last week's ECB rate cut have indicated that the ECB is still willing to do more on policy depending on inflation developments, which should limit how far the EUR can recover. However, with the market very short of euros following the rate cut last week, and renewed Fed Taper prospects, positions may need unwind some before the EUR can record new lows.

    [USD, JPY]
    USD-JPY consolidated gains as 100 during Tuesday's session. Japanese bank orders put a top in place at 99.80 and was the catalyst for a minor correction, which extended just below 99.50 in Asia. The downturn in USD-JPY has been absorbed by a EUR-JPY bid. There is very large exposure in USD-JPY from 100.00, though topside protection has increased via plain vanilla demand and exotic structuring. There is reportedly significant exposure from 101.00 and 103.00 that is due to roll off late December. These positions could be threatened if Fedspeak backs up policy tapering in December. We anticipate elevated interest for topside hedging and vol has also backed up to reflect this risk.

    [GBP, USD]
    Cable steadied consolidated near 1.5900 overnight as the dollar bid moderated, while an extended short covering rally in EUR-USD also gave the pound some legs. Bids ahead of 1.5850 on Tuesday were heavily influenced by outstanding option barriers. The GBP move was also a bit overdone in a kneejerk reaction to softer U.K. CPI data. Looking at the bigger picture a cooler CPI reading is a positive in the medium term. The number will ensure that BoE maintains forward policy guidance at a time when the U.K. economy is showing signs of a self sustaining recovery. We expect corporate hedging to go through at current levels, while Asian reserve recycling could also be a benefit. There is some near-term resistance on the short term chart toward 1.5940-50, but with daily chart well under water prices may drag ahead of the BoE Inflation Report. U.K. employment data is also due.

    [USD, CHF]
    CHF was mixed amid contrasting flows in EUR and USD. USD-CHF moved back into 0.9160 compared with last week's 0.9250 peak. The impact on EUR-CHF was muted as EUR-USD drifted higher. The dollar is still expected to trade on the firmer side amid a rise in Fed taper expectations, though a period of sideways movement may influence in the near-term before trending higher again. The SNB are likely to monitor the EUR outlook after ECB rate cut reinforced downside pressure. SNB's Jordon said last week that the ECB rate cut created a "complex situation" and that the SNB needs to wait to assess the impact of the move. So far, EUR-CHF movement under 1.2300 has been limited by local name bids into 1.2275-80.

    [USD, CAD]
    USD-CAD put in a two-month high over 1.0505 on Tuesday during the European morning amid the greenback's generally firmer tone in the aftermath of better U.S. data last week. However, further gains were thwarted by reported offers from 1.0510. With bids in place from 1.0480, the pairing found itself back in a narrow, though higher trading band for now. There was little in the way of data to drive prices yesterday, so focus may continue to remain on U.S. yield performance and risk levels over the course of today's session.

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