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By XE Market Analysis October 25, 2013 2:34 am
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    XE Market Analysis: Europe - Oct 25, 2013

    The dollar maintained softer levels, though against the commodity bloc currencies it continued to hold up following Thursday's liquidation of stale long positions. There was further reports of Asia reserve diversification out of the dollar, which benefited EUR and GBP, while AUD also saw residual inflows. USD-JPY continued to trade on the heavy side and look poised to sustain a move lower after it backed away from the 200-dma near 97.30. NZD was weighed after comments from RBNZ Governor Wheeler weighed on rate hike expectations. Japan core CPI rose 0.7% y/y in September from 0.8% in August, which slightly was disappointing, but core-core inflation, which strips out volatile food and energy prices, was flat and is the first time since December 2008 that it has not been in negative territory. Liquidity tightness in China continued to cast a shadow across regional markets.

    [EUR, USD]
    EUR-USD touched new trend highs over 1.3830 on Asian sovereign demand, which went through ahead of the Asia close. Ahead of then activity was relatively low for a large part of the session. Underlying dollar heaviness was absorbed by EUR-JPY supply from large Japanese names. EUR-USD continues to find support under the 1.3800 mark amid the Fed outlook and the bullish underlying trend, though intra-day very heavy offers are still said to be in place up to 1.3850.

    [USD, JPY]
    JPY traded on the firmer side overall. Natural dollar emerged ahead of the Tokyo fix, which lifted USD-JPY towards 97.45, but beyond then general dollar selling weighed over the Tokyo afternoon. Continued liquidity tightness in China weighed on speculative positioning and AUD-JPY and EUR-JPY weakness forced USD-JPY under 97.00 by late Asia. The reaction to Japan CPI data was muted and Japanese officials made cautious remarks after the release. Finance Minister Aso said more time was needed to escape deflation, while Economy Minister Amari wanted to see a pick up in demand and an increase in wage gains, though admitted that the numbers were a step in the right direction.

    [GBP, USD]
    Cable is trading over 1.6200 after Asian central bank demand went through in late Asia. GBP front running is also evident as market participants await the first preliminary estimate of U.K. Q3 GDP. The Cable upside has been tempered by a double top near 1.6260 this week, along with increased rebalancing out of GBP by fund names on upticks. The improved conditions in the U.K. economy are now well priced in and GBP longs may begin to show increased sensitivity to more moderate U.K. data like we saw during Thursday's session.

    [USD, CHF]
    USD-CHF has found a modicum of support on dips since 0.8900 barriers were flushed out. There are long-term corporate flows that are limiting the downside, along with residual option related activity. The underlying tone is still skewed to further downside pressure though due to underlying interest to sell the dollar amid the Fed policy outlook. So far, this has not has a significant impact on EUR-CHF, though the more choppy equity market backdrop has forced it from over 1.2350 to 1.2280 over the course of the week.

    [USD, CAD]
    USD-CAD has held firm since it cleared 1.0400 barriers and extended to 1.0440. Good volumes were reported on the way up, though the dovish BoC statement on Wednesday, and softer U.S. and EU PMI's likely set the tone. Further buy stops are expected to feature behind 1.0450 barriers, though given the gains in last two sessions it wouldn't surprise us to see some moderation in the rally.

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