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By XE Market Analysis November 17, 2014 3:00 am
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    XE Market Analysis: Europe - Nov 17, 2014

    The JPY rebounded from fresh trend lows in volatile trade in the wake of a shocking Japanese GDP outcome, which unexpectedly dropped by 1.6% in the preliminary reading for Q3 (saar), well off the 2.2% median forecast and after diving 7.3% in Q2. USD-JPY initially spiked to a new seven-year peak at 117.05 following the data release before turning tail and dropping some 150 pips to a low of 105.45. The drop cam as Japanese stocks dove sharply, which fits the usual inverse correlation that the yen sees during periods of sharp swings in risk appetite. Japan Economic Minister Amari admitted that the impact of the first sales tax hike was "bigger than expected," and that, therefore, the cabinet will carefully scrutinize a second hike. Elsewhere, EUR-USD traded to a new high for the month at 1.2514 as a consequence of the dollar's losses against the yen. Cable and AUD-USD saw a similar price action. BoE's Haldane says watching risks of low inflation "like a dove," and SNB President Jordan repeated that a "yes" vote at the Nov-30 "Save our Swiss Gold" referendum would curtail the central bank's ability to defend the franc's cap, which is "currently our main policy tool."

    [EUR, USD]
    EUR-USD traded to a new high for the month at 1.2514 as a consequence of the dollar's losses against the yen in the wake of the Japanese GDP shocker. This left a peak at 1.2577, which took out the 20-day moving average, presently at 1.2555, for the first time since Oct-28. The euro subsequently drifted back to the low 1.25s. Last week's above-forecast GDP data out of the Eurozone has given the euro a better underpinned, helping seen the T-Note over Bund yield advantage whittle down a few basis points. We remain bearish in the bigger picture on the basis of our anticipation for higher growth in the U.S. relative to the Eurozone over the next six months, looking for an eventual move on the Oct 2012 low at 1.2040. The ECB will also start buying ABS this week, and looks headed to widen the scope of asset purchases to include corporate bonds. Initial EUR-USD resistance is marked at 1.2555 and 1.2577-80, support at 1.2500, and 1.2394-1.2400.

    [USD, JPY]
    The JPY rebounded from fresh trend lows in volatile trade in the wake of a shocking Japanese GDP outcome, which unexpectedly dropped by 1.6% in the preliminary reading for Q3 (saar), well off the 2.2% median forecast and after diving 7.3% in Q2. USD-JPY initially spiked to a new seven-year peak at 117.05 following the data release before turning tail and dropping some 150 pips to a low of 105.45. The drop cam as Japanese stocks dove sharply, which fits the usual inverse correlation that the yen sees during periods of sharp swings in risk appetite. Japan Economic Minister Amari admitted that the impact of the first sales tax hike was "bigger than expected," and that, therefore, the cabinet will carefully scrutinize a second hike. We expect divergent economic and central bank policy paths between the U.S. and Japan will remain broadly supportive of USD-JPY, and expect an eventual move on 120.00.

    [GBP, USD]
    Cable has steadied at firmer levels after making a 13-month low at 1.5593 on Friday, which extended the decline set in motion by the release of the November BoE Quarterly Inflation Report last Wednesday, which trimmed both GDP and inflation forecasts while noting that CPI is likely to fall below 1% over the next six months. BoE's Broadbent subsequently said that disinflationary trends will persist for a while and BoE's Haldane says watching risks of low inflation "like a dove." We anticipate more of the bear trend as we see U.K.'s recovery pace will continue to be eroded by economic stagnation across the Channel and slowing in some key emerging economies. Resistance is at 1.5735-40, support at 1.5650. We anticipate a move on 1.5500.

    [USD, CHF]
    EUR-CHF clocked a fresh 26-month low at 1.2011 on Friday -- the twelfth consecutive day the franc has edged out a fresh high against the euro. The threat of SNB intervention is high given the nearing proximity of the franc's cap at 1.2000. The SNB's resolve in any defence can be expected to be resolute. President Jordan said last week that the cap will remain in place for the "foreseeable" future as it is "essential" for preventing deflation. Jordan also said last month that negative interest rates could be deployed as an extra defence if need be. The franc hasn't seen the south side of 1.2000 since the cap was implemented in Sept 2011. Euro weakness and bouts of risk aversion have been weighing on EUR-CHF recently, while the approach of the so-call "Save our Swiss Gold" referendum in Switzerland on Nov-30 is seen as potentially bearish for EUR-CHF. Jordan repeated in a press interview that a "yes" vote would curtail the central bank's ability to defend the franc's cap, which is "currently our main policy tool."

    [USD, CAD]
    USD-CAD dipped to two-week lows under 1.1300 after failing to muster a challenge on the major-trend high at 1.1467. We still expect further greenback gains as the risk of continued soft oil prices will be a relative downer for the Canadian dollar. Resistance is marked at 1.1400 and 1.1480-1.1500, support is at 1.1260-65-1.1250.

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