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By XE Market Analysis November 18, 2014 2:31 am
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    XE Market Analysis: Europe - Nov 18, 2014

    The dollar consolidated during the pre-European session in Asia. EUR-USD settled around the 1.2470 mark after drifting up from around 1.2450. There was little appetite for follow-through euro selling following yesterday's remarks by ECB's Draghi, who said the monetary policy will take time to reach the real economy and suggested that the central bank can do more once policy makers have implemented structural reforms. USD-JPY carved out a 116.42-116.78 range in Tokyo, holding below the 117.05 seven-year peak see on Monday. Japanese policymakers continued to chew on trade-offs between stimulus, deficit spending and tax hike delays. Finance Minister Aso warned that raising the sales tax is unavoidable, regardless of timing as it is important to maintain market credibility with Japan's finances, and that ultra-loose monetary policy was about supporting fiscal reform. AUD-USD settled in the low 0.87s. The RBA minutes to the November meeting repeated that a period of rate stability is likely the most prudent course, and that the currency remains overvalued despite recent depreciation, remaining above "most estimates of its fundamental values." Elsewhere, EUR-CHF continued to trade heavily, holding about 15 ticks above the SNB's 1.2000 franc cap.

    [EUR, USD]
    EUR-USD settled around the 1.2470 mark after drifting up from around 1.2450. There was little appetite for follow-through euro selling following yesterday's remarks by ECB's Draghi, who said the monetary policy will take time to reach the real economy and suggested that the central bank can do more once policy makers have implemented structural reforms. Draghi's message was essentially that the central bank is on a 'wait-and-see' footing, so it makes some sense that the euro wouldn't see sustained selling on this. We remain bearish in the bigger picture, however, 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 1.2443-50, and 1.2394-1.2400.

    [USD, JPY]
    USD-JPY carved out a 116.42-116.78 range in Tokyo, holding below the 117.05 seven-year peak see on Monday. Japanese policymakers continued to chew on trade-offs between stimulus, deficit spending and tax hike delays. Finance Minister Aso warned that raising the sales tax is unavoidable, regardless of timing as it is important to maintain market credibility with Japan's finances, and that ultra-loose monetary policy was about supporting fiscal reform. Markets will have to wait for specifics, though expectations for more stimulus following the unexpected negative Q3 GDP reading gave Japanese stocks a big boost today, with the Nikkie posting a 2%-plus gain. We expect divergent economic and central bank policy paths between the U.S. and Japan will remain broadly supportive of USD-JPY, and anticipate an eventual move on 120.00.

    [GBP, USD]
    Cable settled to a consolidation in the mid-1.56s, above last Friday's 13-month low at 1.5593. The dust has settled after last Wednesday's release of the November BoE Quarterly Inflation Report sparked a dive in sterling, as it 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 his colleage Haldane remarked that he is watching disinflation risks "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 1.5593-1.5600. We target 1.5500.

    [USD, CHF]
    EUR-CHF remains heavy after clocking a fresh 26-month low at 1.2010 on Monday, which was the thirteenth 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 implemented 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 this week 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 has 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, however, 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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