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By XE Market Analysis October 7, 2013 3:08 am
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    XE Market Analysis: Europe - Oct 07, 2013

    Risk aversion dominated the Asia session as the impasse over the U.S. debt ceiling extended through the weekend. The House passed a bill guaranteeing that all federal workers laid off during the government shutdown will be eventually paid the wages they would have earned when they were not allowed to work. Some workers were also called back to work. However, the lack of progress between Obama and Boehner kept JPY underpinned, while the USD continued to trade on the heavier side on U.S. uncertainty and the impact on the growth outlook. This weighed on the commodity bloc currencies and AUD fell from 0.9450 and NZD moved back below 0.8300. The World Bank cut its forecast for 2013 growth to 7.1% from 7.8% previously amid slower growth in China and India compared with its April forecast.

    [EUR, USD]
    EUR-USD started the session near 1.3550 and probed levels above the 1.3570 area as the dollar was weighed by the lack of breakthrough on weekend negotiations between Obama and Boehner. However, Friday's move under 1.3600 reduced heavier EUR demand and offers ahead of 1.3600 resulted in sideways action. The EUR should find a modicum of support on dips, but ranges are likely to remain tight as the topside is limited by a weaker daily chart pattern.

    [USD, JPY]
    USD-JPY continued to trade on a heavy footing amid risk aversion. USD-JPY pulled back from 97.40-50 in early Asia-Pacific trade and ebbed from 97.30 to 97.00 when the Tokyo session got into full swing. A weak equity market tone pressurised bids, though institutional investor demand and talk of semi-official bids absorbed dollar supply. These flows were evident all the way down last week and kept key support at 96.80-85 intact. Fund names are expected to sell into strength and offers lie between 97.50 and 97.80 and across the 98.00 region.

    [GBP, USD]
    GBP losses have slowed, but it was one of the currencies that took a major hit late last week as overstretched longs liquidated exposure. It is widely thought that EUR-GBP was the catalyst for the broad based GBP correction. Early last week EUR-GBP moved into 0.8033, which is 1.2000 on the reciprocal rate. This is a major long-term hedging level and as corporates took advantage of GBP levels it caught the market long. However, long-term economic fundamentals are still a GBP positive and Cable has found buyers ahead of 1.6000, while EUR-GBP is capped ahead of 0.8500.

    [USD, CHF]
    Late last week a USD-CHF rebound from under 0.9000 boosted EUR-CHF to the 1.2300 region. We anticipate dollar sellers on strength until the U.S. debt impasse is resolved and this should limit USD-CHF gains over 0.9050. EUR-CHF pulled back from the 1.2300 region in Asia and edged back to 1.2370. Note, however, that movement under 1.2230 last week met very strong Swiss name support amid talk of long-term barriers at 1.2200. There was also speculation that the SNB may be supporting USD-CHF on dips in order to offset potential downside pressure in the cross. The thinking is that an extended USD-CHF downturn could destabilise EUR-CHF and threaten the SNB's lower limit at 1.2000.

    [USD, CAD]
    USD-CAD recovered from levels under 1.0300 and edged back towards the 1.0310 area. Volumes were very low overnight, but CAD$ tended to track movement via the other commodity bloc currencies, which were weighed by uncertainty over the growth outlook as the impasse over the U.S. debt ceiling extended beyond the weekend. USD-CAD may remain hemmed in early on in the week as speculative flows are kept to the minimum. Close-to-market bids lie at 1.0280-90 and offers from short term accounts are noted from 1.0320-30 ahead of corporate hedging flows from 1.0340-50.

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