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By XE Market Analysis August 21, 2013 6:15 am
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    XE Market Analysis: North America - Aug 21, 2013

    The dollar found light support against the FX majors ahead of the FOMC minutes. Movement across risk assets remained defensive, but the impact wasn't felt in the majors. However, the commodity currencies remained under pressure as market participants continue to digest the implications of reduced central bank policy stimulus. AUD tested 0.9000 during the European morning and USD-CAD extended gains to 1.0448 highs before option related offers capped. GBP held up, largely ignoring an unexpected rise in U.K. public sector borrowing, as the focus remained on the recent run of better U.K. data. Notably, U.K. CBI industrial trends posted the highest levels in two-years at 0 from -12 previously. The two-year German auction saw a rise in refinancing costs in line with the recent pick up in market rates.

    [EUR, USD]
    EUR-USD profit taking went through and forced the pair back to the first line of natural support around 1.3380-85. The downturn in the EUR was a consequence of corporate hedging activity and residual reserve management flows as some Asian accounts look to build up dollar holdings after using the currency to stave off capital outflows in recent sessions. The daily close above 1.3400 was a positive on Tuesday, but shorter term indicators flagged waning topside momentum. EUR longs are probably unwilling to push the market too far, with the FOMC minutes expected to dictate direction in the latter part of the week.

    [USD, JPY]
    USD-JPY ran into strong Japanese offers ahead of 97.70 in early Europe, leaving it close to option expiry congestion at 97.50-60 for today's N.Y. cut. There are also strikes at 97.00 and 98.00, which could reinforce the narrow trading range. There was a build up in USD-JPY longs around 97.00 overnight and during Tuesday's session. There are expectations that if the Fed gets a handle on managing policy tapering then USD-JPY could reassert itself on higher levels. Comments from BoJ Governor Kuroda have also offered encouragement in the last session. He sounded willing to ease policy again in order for it to reach the 2% CPI target. Kuroda has no problem with the sales tax hike either in comments made overnight and has previously backed fiscal consolidation. Abe is more likely to be willing to push the reform process if he believes that the BoJ will play its part and ease policy again.

    [GBP, USD]
    GBP traded on a firm footing. Cable has been underpinned ahead of 1.5650 since yesterday's N.Y. close, leaving bias on barriers at 1.5700. U.K. borrowing rose in July. Corporate hedging went through EUR-GBP and it pulled back from 0.8565 in early trade back towards 0.8540. U.K. government borrowing rose in July due to higher government departmental spending, leaving a budget deficit. There wasn't any impact on GBP, which is still basking in the recent U.K. data improvement. Large buy stops are building in Cable over 1.5700 and longs are still positioned for a push on previous trend highs from mid-June around 1.5750.

    [USD, CHF]
    CHF is still supported as the equity market backdrop remains fragile ahead of the FOMC minutes. EUR-CHF is hovering around 1.2300 and could take another look lower down if risk aversion was to steepen further in the N.Y. session. The furious pace of deleveraging that drove EUR-CHF higher on Tuesday in early Europe ran steam as emerging FX stabilised due to central bank intervention. USD-CHF should lead action in the latter part of the week as a consequence. Yesterday it broke lower after a very large bid was pulled, but has edged back towards 0.9200 on light dollar short covering. Larger sell-interest is expected to go through again from 0.9220 and 0.9250 intra-day.

    [USD, CAD]
    USD-CAD continued its move higher after it cleared 1.0400 on Tuesday. More selling via the commodity bloc currencies was evident in Asia and Europe again and USD-CAD broke to 1.0448 highs. Only option barriers at 1.0450 stopped USD-CAD from rising further. Equity markets are still fragile and commodity traders are beginning to ponder the implications of reduced central bank stimulus. The downturn this week reflects a broad reduction in risk. The thinking is the growth outlook may be impaired should the Fed and other central banks pull back on stimulus. We suspect this could result in a move back over 1.0500 eventually.

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