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By XE Market Analysis April 13, 2015 7:34 am
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    XE Market Analysis: North America - Apr 13, 2015

    The dollar put in another bout of outperformance, with EUR-USD logging four-week lows under 1.0530, USD-JPY pushing to three-week high territory above 120.80, Cable making new major-trend lows under 1.4570, and AUD-USD ebbing to 11-day lows, drawing closer to its Apr-2 cycle low at 0.7533. The move is concomitant with a fresh push out in the dollar's yield advantage, which has pushed above 180 bp in the case of the 10-year T-note over Bund spread, and above 160 bp in the JGB spread. The Australian dollar's yield advantage over the greenback, meanwhile, narrowed below 40 bp. AUD-USD's drop was quite sharp, and the Aussie also posted losses against the yen and euro, with the currency underperforming after a big miss in China trade data, with exports down 15% in March, sparking speculation of a sub-7% outcome in Wednesday's GDP data. Australian Treasurer Hockey also said that the upcoming May budget update will assume iron ore prices falling to $35, down from the $60 estimated in December.

    [EUR, USD]
    EUR-USD logged a sixth consecutive lower low in making a four-week low at 1.0521, extending the slide from last Monday's peak at 1.1035. That's a big move, reflective of the underlying fundamental bearishness of the market. On the dollar side of the coin, the U.S. still has slack in the economy, and this is causing the Fed to drag its feet within regard to tightening, but the recovery process is underway and the general view is that the typically laggard labour market will see more wage rises later in the year, which will be the key metric to cause the Fed to eventually pull the rate-hike trigger. On the euro side, reserve and real-money fund managers continue to have to face up to the risk of a 'Greekaccident' scenario and all its possible consequences, while the ECB's EUR 3 bln per day money printing program won't be conducive to euro recovery. We continue to expect parity will be reached in EUR-USD. The Mar-12 cycle low at 1.0462 offers an interim focus. Resistance is marked at 1.0683 and 1.0700. The 20-day moving average is at 1.0806.

    [USD, JPY]
    USD-JPY rose to three-week high near 121.00. Friday's low at 120.05 and the 20-day moving average at 119.97 mark key near-term support levels. Overall, the pair has been plying a broadly sideways path since early December, though we remain moderately bullish. The Fed remains on course for an eventual rate hike, and while albeit on an uncertain timetable this is a stance which contrasts that of the BoJ. We see scope for a return to recent highs in the 121.00-122.00 area, and potential to 125.00 beyond here.

    [GBP, USD]
    Cable logged a fresh low at 1.4566, and the pound also saw losses against the euro and yen. We recommend a short position in Cable into the upcoming May-7 election, targeting a revisit to the low seen in May 2010 at 1.4229. It is highly probable that the election will produce a hung parliament, though it's uncertain whether a coalition government will form, or a minority government will come into existence. There is also a good chance that the SNP (Scottish Nationalist Party) could end up holding the balance of power, and another uncertainty is the possibility that a new election might be called (though most pundits reckon this would be unlikely in the event of a hung parliament). There are numerous possibilities in terms of policy implications, ranging from 'anti-business' fiscal tightening to, if the Conservatives do well, a course to hold a referendum on EU membership by 2017. The fiscal policy of the government may also lack clarity. UK markets have started to factor these risks as the elections starts to loom large on the horizon. With poll after poll pointing to a messy outcome, sterling looks set for more bouts of wobbles.

    [USD, CHF]
    EUR-CHF has drifted to 10-week lows under 1.0400 amid the latest bout of euro underperformance. While this is the case, the SNB will probably be best advised to sit on its hands, although the SNB said at its March policy review that the franc is "significantly overvalued and should continue to weaken over time," and that it will continue to take account of the franc rate situation in policy decisions and "remain active in the foreign exchange market, as necessary." Both the SNB and SECO cut growth forecasts in light of the sharp franc appreciation that was seen in January after the central bank abandoned the 1.20 floor in EUR-CHF. The SNB expects growth of just under 1% this year (down from 2% expected previously) and SECO 0.9% (from 2.1%).

    [USD, CAD]
    USD-CAD recouped the 1.2600 level but has remains below Friday's two-week high at 1.2466. Yield differentials should remain a U.S. dollar positive into 2016 as the Fed remains on course to tighten policy, albeit on a less certain timetable than was envisaged before the March jobs report, weakness in which was more about mean reversion after a series of outsized headline gains than a change of trend. The Mar-17 trend high at 1.2835 and the Aug-2009 high at 1.3063 are bigger-picture targets. USD-CAD support is at 1.2557 (50-day moving average) and 1.2500.

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