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By XE Market Analysis October 4, 2013 3:22 am
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    XE Market Analysis: Europe - Oct 04, 2013

    The dollar consolidated losses in Asia, though anxiety over the U.S. government shutdown weighed on sentiment and kept safety players underpinned. JPY was supported on dips, along with the CHF, while EUR maintained a relatively firm tone after it extended recent gains on Thursday. Only Cable was a bit weaker than it has been of late, which was a function of a stop-related rally in EUR-GBP up to 0.8439 into and beyond yesterday's London close. The BoJ left policy unchanged as-expected, leaving the focus on events in Washington. There were reports on Thursday that Speaker Boehner is willing to do what is necessary to avoid a default. Fed speakers have indicated that policy is likely to remain on hold until the gridlock in D.C. is overcome, which could prove to be a positive for markets beyond the debt ceiling.

    [EUR, USD]
    EUR-USD traded an extremely tight range either side of 1.3620 throughout the Asia session. It broke to trend highs at 1.3646 after the European close as U.S. yields fell with stocks on investors angst over the U.S government shutdown, and after a weak U.S. non-manufacturing ISM. However, comments from Speaker Boehner sounded as if there is enough resolve in order to reach a deal ahead of the debt ceiling deadline and this helped the dollar to a degree. The underlying EUR tone will remain positive until D.C. works through this impasse and bear in mind that good support at 1.3450-60 has held since the September-18 rally. Longs are still targeting a move through 2013 highs above 1.3700, though progress looks likely to be slow due to heavy order congestion related to reserve management and outstanding options.

    [USD, JPY]
    USD-JPY maintained a heavy tone, but held above 97.00 throughout the session. A brief move under 97.00 on Thursday met very heavy demand from institutional investors and a semi-official name, which deterred dollar sellers today. There was importer demand over the Tokyo fix, which lifted it back to the 97.40 area. However, follow through was limited due to risk aversion and it looked vulnerable just ahead of 97.00 at the European open. The BoJ's policy decision was a non-event as it kept policy unchanged in line with expectations. The press conference from BoJ Governor Kuroda should also back easy policy until CPI reaches 2%. Kuroda has also sounded willing to offer more stimulus next year to offset any adverse impact from the sales tax hike.

    [GBP, USD]
    Cable is breaking lower as EUR-GBP strength has forced a correction below support at 1.6150-60. The cross ramped up over Thursday's European close and stops gave way through 0.8410 and it eyes a move on the 0.8450 area today. Model fund activity should keep the cross elevated. However, Cable bids should the slow the downturn into 1.6130 and more demand is anticipated into 1.6100.

    [USD, CHF]
    CHF continues to trade on the firmer side, leaving USD-CHF under 0.9000 and EUR-CHF under 1.2250. CHF inflows were absorbed to a degree late Thursday by central bank speculation. Talk emerged out of London that the USD-CHF downside was limited by demand related to SNB activity. USD-CHF had not traded under 0.8990 since late February 2012 and the SNB could be concerned that if USD-CHF sustains a break lower than it may destabilise EUR-CHF. The cross downside has also been slow since it found support near 1.2215 on Tuesday, where very good Swiss and German demand emerged ahead of option barriers at 1.2200.

    [USD, CAD]
    USD-CAD maintains a narrow range. The topside was capped on Thursday by a layer of corporate offers at 1.0340 and this eventually forced jobbers to turn positions. However, progress on the downside is being limited by bids between 1.0320 and 1.0300. We think this theme is likely to continue into the N.Y. open, though today's Canada Ivey PMI may inject a bit of volatility. We anticipate a rise to 55.0 from 51.0 previously.

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