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By XE Market Analysis October 10, 2013 3:31 am
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    XE Market Analysis: Europe - Oct 10, 2013

    There is mild optimism in early Europe that the impasse in D.C. could reach a breakthrough. The WSJ said that conservative Republicans are coming round to the idea of an increase in the U.S. borrowing limit, while the National Journal said that Republicans are on track to approve a debt limit extension - lasting between four and six weeks, which would allow time for subsequent fiscal negotiations. According to the report, a short term deal could be passed as early as Friday. This has seen European equity market futures trend higher ahead of the cash market open, which is keeping JPY and CHF on the slightly softer side. The USD is still holding on to a firmer tone, which is a consequence of yesterday's reduction in positioning and the recent rise in funding costs. The European calendar may not have a great deal of influence ahead of developments in D.C. However, there are more production releases to digest and inflation numbers out of Scandinavia. The BoE should leave policy on hold and the ECB monthly report should not deviate from last week's ECB press conference.

    [EUR, USD]
    EUR-USD started the session around 1.3525, but having tested levels under 1.3500 on Wednesday bias remained with the downside. Short term funds picked up dollars after the accelerated gains yesterday, which were pinned on repositioning and increased USD funding costs. EUR traded into the 1.3490 area in late Asia and could test near-term support at 1.3450-60, which has held since the previous Fed meeting in September. Selling EUR into upticks is likely to continue in the very near-term. Initially, 1.3530 should cap and larger order flow is anticipated from 1.3560-70.

    [USD, JPY]
    USD-JPY benefited from a moderate rally via the Nikkei 225. It moved up from the 97.30 region on importer demand and further appetite to reduce recent dollar short positions, which carried it to 97.80. The JPY-crosses also remained healthy, which is a function of investor demand for overseas asset rather than sentiment. Despite the rally in Japanese stocks today there is still investor uncertainty coming from events in D.C. However, EUR-JPY has been fairly robust on a 131 handle and AUD-JPY has been a buy on dips since the start of the week. The 5.4% m/m rise in Japan core machinery orders was positive and supports the view that the Japanese recovery is picking up.

    [GBP, USD]
    Cable maintained a heavier tone after Wednesday's move into the 1.5920 area as the dollar bid steepened. Dollar demand was the standout trade, though U.K. data weakness compounded the sterling sell-off ahead of today's BoE policy outcome, where unchanged policy is expected. The Cable sell-off will accelerate rapidly if 1.5900 and 1.5875 gives way, which is being hedged against via short dated GBP puts across 1.5900. GBP may get mild support from talk of corporate related sell-interest via EUR-GBP to go through for today's 10GMT fix.

    [USD, CHF]
    EUR-CHF maintained a firm tone near the 200-dma above 1.2300 as underlying dollar strength boosted USD-CHF over 0.9100 on Wednesday. Sentiment improved into today's European session amid hopes that a short term debt deal could be agreed in order to give time to work through subsequent fiscal negotiations. This should leave the CHF on the softer side, though near-term movement will come from USD direction. USD-CHF could break out on the topside if it overcomes resistance between 0.9150 and 0.9170.

    [USD, CAD]
    USD-CAD is trading on a robust footing after underlying dollar strength triggered stops above 1.0400 and it extended into September-9 highs near 1.0420. Resistance from profit take orders and more options exposure from 1.0425 encouraged tentative selling from 1.0420 at the European open, though the downside is meeting good short term support from fund names and model funds playing the short term trend higher.

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