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By XE Market Analysis October 11, 2013 2:23 am
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    XE Market Analysis: Europe - Oct 11, 2013

    A breakthrough in the U.S. debt impasse boosted risk appetite, which weighed on JPY and CHF. The USD was also a bit easier as appetite for leverage positions kept EUR, GBP and AUD supported on dips. Republicans offered a short-term plan to raise the debt ceiling limit, which will give time to negotiate further on fiscal issues and could enable the government to re-open. Democrats and Republicans are locked in meetings and the plan will still need to pass the House. There was optimism on China after PBoC vice governor Gang said GDP was expected to beat the official target of 7.5% this year and long term growth was likely to be maintained above the 7% level. Japan's corporate goods price index rose 0.3% m/m and 2.3% y/y as expected due to yen depreciation. India has started a series of talks to enter leading benchmark indexes, which could attract billions in investment inflows, though a major hurdle is its withholding tax on foreign investment in government debt.

    [EUR, USD]
    EUR-USD benefited from EUR-cross flows. Most of the action went through EUR-JPY in Asia, but EUR-CHF also maintained a firm tone after it edged up to 1.2330 and EUR-GBP was steady near 0.8465. EUR-USD is still holding above key support from 1.3460, which has held since the middle of September. Movement into 1.3500 and below met very strong demand from an Asian sovereign on Wednesday and Thursday and could be indicative of range binary exposure with 1.3650 also being protected by similar flows. The focus will come from Washington D.C. into the weekend.

    [USD, JPY]
    USD-JPY and the JPY crosses were buoyant on a broad rise in risk appetite. There was heavy dollar demand over the Tokyo fix with Japan and U.S. closed for a long weekend, while demand for the JPY crosses was prevalent related to investment trust launches. The dollar pairing ran into light selling in early trade on reports that Obama rejected the short-term deal offered by the Republicans, though there were conflicting reports that followed and hopes for a deal lifted it from 98.00 to 98.50 over the Asia afternoon. EUR-JPY moved up from 132.50 to 133.45 and AUD-JPY rose from 92.50 to 93.45.

    [GBP, USD]
    Cable has benefited from a rise in risk appetite on hopes that U.S. politicians can end the government shutdown and agree on debt limit deal. Very strong demand for the JPY crosses has lifted GBP-JPY from 156.50 to 157.50 overnight and saw Cable edge up to 1.5995. Short term bias is slightly in favour of the topside, though daily studies are still a little weak after the GBP correction earlier in the week. Aiding the Cable upturn is a pick up in EUR-GBP supply, with a heavy congestion of orders coming into the market ahead of 0.8500 on Thursday. We anticipate good size buy stops through 1.6000.

    [USD, CHF]
    CHF is consolidating near the bottom of the range as market participants await a potential short term debt limit deal in the U.S. and an end to the government shutdown. The signs were positive on Thursday, but overnight press reports suggested that both sides are still locked in talks and no deal has been agreed yet. USD-CHF and EUR-CHF traded in 0.9130 and 1.2130, respectively. However, offers that were well flagged during Thursday's European morning kept gains in check for now. Setbacks have been very shallow so far as market participants hold out hope on a potential breakthrough in Washington. A move in the right direction could lift USD-CHF back on a 0.92 handle eventually, while the downside looks limited now between 0.9100 and 0.9060.

    [USD, CAD]
    The CAD got a bit of a boost from the improved expectations for political movement in the U.S., which took USD-CAD to session lows of 1.0372 on Thursday. However, follow through was limited due to standing bids from 1.0370 and it edged back to 1.0410 overnight. Short term accounts faded upticks due to the rise in risk appetite, but movement is still fairly limited. We expect momentum to begin to pick up on a move through 1.0350 however (Wednesday lows), where 1.0300 could be targeted.

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