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By XE Market Analysis November 20, 2014 3:04 am
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    XE Market Analysis: Europe - Nov 20, 2014

    USD-JPY rallied to a new seven-year high for the fifth consecutive day, reaching 118.70 and showing scant sign of corrective pullbacks. EUR-JPY, meanwhile, extended further into six-year high territory, and GBP-JPY and other yen crosses also made new trend highs. PM Abe's rush for a new mandate for Abenomics (elections to be held Dec-14) has been driving the latest drop in the yen. The dollar's yield advantage over the yen is pushing back to recent highs near 190 bp at the 10-year bond maturity level. A solid 9.6% y/y rise in Japanese exports in October after a 6.9% increase in September, had little forex impact, and nor did news of a 5.3 earthquake in Japan, which came without a tsunami warning. China's flash HSBC-Markit manufacturing PMI fell to 50.0 in November from 50.4 in October, illustrating a slowing growth pace in the Chinese economy. Outside the USD-JPY, case most dollar pairings saw narrow ranges, though AUD-USD managed to carve out a two-week low at 0.8583, concomitant with an underperformance in Australian stocks today following the weak China data and fresh weakness in commodity prices. EUR-USD posted a narrow range around 1.2540-50.

    [EUR, USD]
    EUR-USD posted a narrow range around 1.2540-50, consolidating lower after running to a 1.2600 high yesterday. The euro seems to have established an underpinning over the last week following a much stronger than expected German ZEW investor confidence, while ECB boss Draghi indicated earlier in the week that no additional easing is likely as the impact of existing measures has yet to take effect (though colleagues repeated the ECB will do more if needed). EUR-USD resistance is at 1.2600, support at 1.2510-12, 1.2500 and 1.2443-50.

    [USD, JPY]
    USD-JPY rallied to a new seven-year high for the fifth consecutive day, reaching 118.70 and showing scant sign of corrective pullbacks. EUR-JPY, meanwhile, extended further into six-year high territory, and GBP-JPY and other yen crosses also made new trend highs. PM Abe's rush for a new mandate for Abenomics (elections to be held Dec-14) has been driving the latest drop in the yen. The dollar's yield advantage over the yen is pushing back to recent highs near 190 bp at the 10-year bond maturity level. A solid 9.6% y/y rise in Japanese exports in October after a 6.9% increase in September, had little forex impact, and nor did news of a 5.3 earthquake in Japan, which came without a tsunami warning. China's flash HSBC-Markit manufacturing PMI fell to 50.0 in November from 50.4 in October, illustrating a slowing growth pace in the Chinese economy. We expect divergent economic and central bank policy paths between the U.S. and Japan will remain broadly supportive of USD-JPY, anticipating move on 120.00.

    [GBP, USD]
    We remain bearish of sterling in the case against the dollar. We see that the 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 1.5687-1.5700, support at 1.5630 and 1.5600. We target 1.5500.

    [USD, CHF]
    EUR-CHF continues to ply a narrow path fractionally above the SNB's no-go limit of 1.2000. The market clearly has no appetite to test the resolve of the SNB, which had intervened decisively in 2011 and 2012 and has made clear that it will do all necessary to defend the cap now. Central bank 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. He has also repeated his and the SNB's aversion to the 'Save our Swiss Gold' referendum in Switzerland, due to be held on Nov-30 , arguing that a 'yes' vote would curtail the ability to defend the franc's cap, which is "currently our main policy tool." Polls suggest that the initiative will be rejected.

    [USD, CAD]
    USD-CAD has re-established itself back above the 1.13 handle. We continue to expect a challenge on the major-trend high at 1.1467 on the back of U.S. dollar strength. The likelihood for continued soft oil prices is also 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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