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By XE Market Analysis August 7, 2013 7:15 am
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    XE Market Analysis: North America - Aug 07, 2013

    Sterling stole the headlines as BoE Carney's first quarterly Inflation Report detailed formal policy guidance. Cable fell on a knee-jerk move from 1.5300 to 1.5206 and then experienced a brutal short squeeze that topped 1.5440. EUR-USD was supported on dips, leaving it close to 1.3300, while USD-JPY was heavy in the low 97s after it registered an early move to 96.82 lows.

    [EUR, USD]
    EUR-USD ended the European morning above 1.3300 as a very sharp Cable short covering rally and strong German industrial production data boosted it from 1.3265. Early on in the session EUR could only manage a tiny rally and then it headed lower. It was hampered by EUR-JPY selling on the back of USD-JPY liquidation early on, which ran its course once stops held from 96.70. There was also sovereign hedging from 1.3320 and real money interest also remained intact higher up from 1.3350. EUR action is quite low so far and even though bias is slightly more favourable for longs it does look like any uptrend will be painfully slow.

    [USD, JPY]
    USD-JPY moved into lows from June-20 just under 96.85 on early spec selling. The Nikkei crashed through the 14k level on deleveraging. The risk-off tone was compounded by Fed taper risk, while yesterday's USD-JPY drop was also a negative trigger for early Tokyo names. According to reports Japan will adhere to the international pledge to halve its deficit by 2015, which exacerbated market nerves as it raises the risk of more fiscal consolidation, though this is unlikely to be a near-term risk. In the coming sessions, USD-JPY longs could cut positions further with BoJ seen on hold and repatriation very likely to pick up amid very large U.S. bond redemption and coupon payments in the second half of August. More good size stops are seen at 96.70 and 96.50.

    [GBP, USD]
    Cable fell on a knee-jerk move from 1.5300 to 1.5206 and then experienced a brutal short squeeze that topped 1.5450. The BoE pinned forward policy guidance on a 7% employment threshold. The BoE expects there to be no tightening signal until early 2016 based on current conditions. However, it named three caveats. It can tighten policy if medium term inflation expectations surge, if inflation was likely to be 2.5% or above in 18-24 months and if the FPC judged that policy was a threat to financial stability. BoE Governor Carney said inflation and not unemployment is still the MPC's target and the challenge for the MPC is to chart the best way back to 2% inflation target. Carney's clarification on the inflation target caused a scramble by sterling shorts as inflation is currently running well above the BoE's target and economic data has been strong.

    [USD, CHF]
    CHF weakened as early EUR movement guided action. USD-CHF found a decent bid from 0.9250 as EUR-USD was unable to sustain a move over 1.3300. A subsequent downturn to 1.3275 lifted USD-CHF back to 0.9280 and helped EUR-CHF from 1.2310 to 1.2325. Swiss CPI did not move the CHF as it should not detract from the SNB's current policy stance. However, we think further swissy weakness may be a struggle from here as stocks markets come under fairly sizeable selling pressure.

    [USD, CAD]
    USD-CAD broke the top of the recent range and a downturn in stocks and commodities weighed. A revival in Fed taper risk also boosted the dollar tone as Fed doves Evans and Lockhart both indicated that a reduction in bond buying was likely later this year. USD-CAD rose from the 1.0380 area and triggered stops through 1.0410 and extended to 1.0430 as Toronto names joined the fray.

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