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By XE Market Analysis September 23, 2013 3:09 am
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    XE Market Analysis: Europe - Sep 23, 2013

    The dollar continued to consolidate softer levels as the Fed outlook remained in the headlines. EUR experienced early demand on dips as Germany's Merkel won the weekend election, but fell just short of a majority and will still need to build a coalition. Japanese markets were closed for Autumn Equinox, but USD-JPY drifted lower as JPY made up ground, with stocks struggling on an uncertain Fed outlook, while the U.S. debt ceiling is also now a potential risk. AUD was the outlier as China flash manufacturing PMI hit a six-month peak of 51.2 in September from 50.1 in August, which lifted it from 0.9370 to 0.9440.

    [EUR, USD]
    USD-JPY has struggled to sustain higher levels as the more defensive market tone weighed on speculative positioning. It was unable to sustain a move on 100.00 last week and light selling via EUR-JPY weighed in thin holiday trade, leaving it just above 99.00. EUR-JPY drifted back towards 134.00 compared with 135.00 last Thursday. Meanwhile, AUD-JPY dipped from 93.30 to 92.90 in early trade and then rebounded to 93.50 on good China manufacturing PMI data. We still think USD-JPY is likely to sustain the sell on rallies theme and the potential risks in the U.S. could cap the dollar, as well as reducing appetite for yen funded carry trades.

    [USD, JPY]
    USD-JPY was hemmed in by option expiries rolling off at 10:00 EDT. Larger maturities were noted at 99.75 and 100.00, which hindered upside momentum. The USD-JPY rally is also suffering from exhaustion after it rallied sharply out of 97.75 since the Fed policy outcome. Restricting USD-JPY topside movement today was the lack of further gains in the JPY crosses. These have moved within a sideways trading pattern and reflect the narrow trading conditions across global equity markets and commodities. USD-JPY traded quietly from there into the close, moving largely between 99.35 and 99.65.

    [GBP, USD]
    Cable is trading close to the 1.6000 level after it corrected from over 1.6150 late last week. GBP was a runaway trade on the topside in recent weeks, but since last week's surprise U.K. retail sales missed there has been a correction of excessive positioning. More sideways action may continue for a short term until the market is more broadly balanced. However, in the medium to long term the improvement in U.K. fundamentals should still leave it on a stable to firmer tone. There are Cable buyers close to the market at 1.5990-00, 1.5970-80 and into 1.5950. Offers are noted from 1.6060 to 1.6080 and across 1.6100.

    [USD, CHF]
    EUR-CHF found support from the Asia Pacific open. Appetite to buy the cross is a function of position trading as EUR-CHF has not sustained a move under the 200-dma since early April. This key level is close to 1.2300 today and encouraged buyers overnight. However, working against the topside is the heavy USD-CHF tone close to 0.9100, while CHF-JPY is still firm near 89.75, but below last week's multi-year highs at 109.41.

    [USD, CAD]
    USD-CAD traded in a narrow range either side of the 1.0300 level overnight. USD-CAD directional bias is limited close to this region. After it rebounded out of 1.0180 last week momentum on the topside has started to drop off. Sell interest that was original parked near 1.0400 was lowered last week after the fallout from the Fed meeting and 1.0330-50 offers should cap now.

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