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By XE Market Analysis October 7, 2014 3:33 am
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    XE Market Analysis: Europe - Oct 07, 2014

    The dollar retained a generally soft tone as the correction from Friday's post-payrolls surge continued. A lot of equity research have been warning about the impact of the strong dollar on multinational corporate earnings, and this seems to be playing a role in the greenback's correction. USD-JPY ebbed to a new low for the week at 108.51, which almost exactly matches the present position of the 20-day moving average. Last Friday's low at 108.35 and last Thursday's low at 108.00 are near-to support levels. The BoJ left policy unchanged by a vote of 8:1, as was widely anticipated, while the statement said that the economy is recovering moderately. Cable popped to a new high for the week, as did AUD-USD following an as-expected RBA decision to leave policy unchanged and despite the statement saying that the recent sharp drop in the AUD is still on sufficient to a stimulate the domestic economy. EUR-USD remained subdued, despite the losses in the dollar elsewhere, with the pair holding around 1.2620-40, comfortably below its Monday high at 1.2675.

    [EUR, USD]
    EUR-USD has remained steady in the low-to-mid 1.26s after rising to a recovery peak of 1.2675 yesterday. The speculative market had built up an extreme net short exposure, as evidenced by the conspicuous lack of euro selling after Monday's weaker than expected German manufacturing orders release, although the divergence between the Eurozone and U.S. growth paths should maintain the bigger-picture downside bias. We still see near-term risk to the upside, perhaps to the 1.2695-1.2600 area, which would 'fill the gap' left by the post-jobs report dive on Friday. These levels mark resistance, ahead of 1.2615 and 1.2675 (Friday's high). On the downside, 1.2500 (last Friday's low) is now a big support level, though in the longer view we are looking for an eventual move on the July 2012 low at 1.2042.

    [USD, JPY]
    USD-JPY ebbed to a new low for the week at 108.51, which almost exactly matches the present position of the 20-day moving average. Last Friday's low at 108.35 and last Thursday's low at 108.00 are near-to support levels. The BoJ left policy unchanged by a vote of 8:1, as was widely anticipated, while the statement said that the economy is recovering moderately. In the bigger picture, yield and growth differentials between the U.S. and Japan should keep the dollar underpinned against the yen. We see scope for an eventual move to 115.00. BoJ boss Kuroda said last Friday that the central bank is aiming to achieve the 2% inflation as "soon as possible," and that a weak currency won't be problematic so long as it reflects fundamentals.

    [GBP, USD]
    Cable has regained a firmer tone as short-covering drove a move back above 1.6000 and 1.6100, putting Friday's low at 1.5951 some way out of reach. We don't expect much more upside progress from here. Last week's U.K. September composite PMI fell a six-month low, and we expect incoming data to show the impact of the stagnating Eurozone economy, which should support BoE MPC member Broadbent's remarks of last week, that the economy is "not ready" for a rate hike. Resistance is marked at 1.6159 (last Friday's high) and 1.6240 (20-day moving average).

    [USD, CHF]
    EUR-CHF is back above 1.2100 after SNB's Jorden said last week that there are additional measures that the central bank could use to enforce the EUR-CHF limit peg at 1.2000. This has put the major-trend low of 1.2044 out of the picture for now. The SNB will find defending the 1.2000 cap a tougher proposition in the context of broad, fundamentally-driven euro weakness than it would be in the case of specific franc outperformance.

    [USD, CAD]
    USD-CAD corrected to the low 1.11s amid a general squeeze on dollar long positions. Friday's high was eight pips shy of the March major-trend peak at 1.1278, which we have been targeting. Support is marked at 1.1100, while major support is now some way off, at 1.0920-26.

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