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By XE Market Analysis December 3, 2013 9:45 am
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    XE Market Analysis: North America - Dec 03, 2013

    We have seen some chop with the USD coming under moderate pressure as the market unwound some of the gains seen after yesterday's firm U.S. ISM report and associated talk of sooner-rather-than-later Fed tapering. USD-JPY was a driver as the yen rebounded during the European AM session after making fresh major-trend lows against the USD and EUR. GBP-USD also had a driving role following a much stronger than expected U.K. construction PMI release, which backed up yesterday's equally impressive manufacturing PMI, while a sub-expectations BRC retail sales report can be downplayed on the grounds of weather influences. In sum, USD-JPY shed about 75 ticks from a fresh two-year peak of 103.37 while GBP-USD posted a 70 pip rally from its lows in recovering to the 1.6420 area, within 25 pips of the two-year peak seen yesterday. EUR-USD rose to the 1.3565-75 area, which is about 35 pips up on yesterday's NY closing levels. The relative underperformance of the EUR was due to data showing Eurozone PPI falling to -1.4 y/y. Both EUR-JPY and EUR-GBP declined. The AUD also managed to stage a recovery after RBA complained that the currency remains too high.

    [EUR, USD]
    EUR-USD rose to the 1.3565-75 area, about 35 pips up on yesterday's NY closing levels as of the late London AM session. However, the EUR underperformed other currencies, including GBP and the JPY. The EUR-JPY cross U-turned after exhausted bullish fuel on breaching 140.00 for the first time in five years. Data showed Eurozone PPI falling to -1.4 y/y, which put the euro under some pressure on the crosses, though EUR-USD still managed to advance amid a backdrop of general USD weakness. Overall, EUR-USD is likely to remain range bound as markets are wary ahead of Thursday's ECB meeting and Friday's payrolls report. We think the balance of risks are to the downside. The ECB is likely to announce further non-conventional easing measures while the U.S. jobs report is likely to come in the firm side (the employment component of the ISM report was solid), which may strengthen Fed tapering prospects. Technically was also had a repeated failure to sustain levels above 1.3600 over the last week.

    [USD, JPY]
    The yen rebound gathered some pace during the European morning session, with notable selling reported in EUR-JPY after the cross breached 140.00 (traded high left at 140.03). The cross subsequently lost just over 70 pips before steadying, with the move driven by profit taking among interbank and high frequency traders, finding added fuel from the triggering of stop orders. A similar story has been seen in USD-JPY, which is presently settled around 102.80 after peaking at a six-month high of 103.37 during the preceding Tokyo session. The market remains bearish towards the yen, given the talk of potentially more BoJ monetary stimulus, and the May peak of 103.73 seems to be a popular target. The rekindled Fed tapering issue makes a nice contrast with BoJ policy following yesterday's dovish talk by BoJ boss Kuroda, which was accompanied by "sources" cited by Reuters that the central bank has a contingency plan for more stimulus.

    [GBP, USD]
    Sterling was buoyed by the strong U.K. construction PMI, which unexpectedly surged to a 10-year high of 62.6, backing up yesterday's equally impressive manufacturing PMI. Cable popped back above 1.6400 in the wake of the release, though the move ran out of steam at 1.6420, shy of yesterday's two-year peak of 1.6443, and the pound has since settled back below 1.6400. The data fits the general and increasingly bullish market narrative about sterling's prospects, which went up a gear after last week's announcement by the BoE that the mortgage part of the Funding for Lending Scheme will be terminated in January, which is tantamount to a slight tightening. Although the market looks a little stretched on a technical basis, we advise a bullish view. We expect a firm services PMI tomorrow and an upbeat tone to Chancellor Osborne's presentation of the government's mid-fiscal year update on Thursday. We have been targeting Cable to 1.6500.

    [USD, CHF]
    USD-CHF jumped higher amid a general bout of dollar buying on Monday, though we expect the pair to ebb now. The rekindling Fed tapering debate should prove supportive for the safe haven Swiss currency, as this backdrop should elicit risk aversion in global market. A three-week trend resistance line in USD-CHF came into play just above 0.9110 on Monday. We need to see a daily close below 0.9060 to confirm the bear trend. Last Friday's low at 0.9028 provides the initial target while trend support comes in at 0.8990. EUR-CHF looks biased toward its range lows seen over the last month in the 1.2280-1.2300 region. The highlight on the Swiss calendar this week is November CPI data, which we expect to tick back to a -0.1% y/y rate following the unexpected dip to -0.3% y/y in October. Continued cool inflation data, which is occurring despite the currency limit peg, will ensure that Swiss policymakers remain fully committed to ultra-easing monetary policy despite improving economic fundamentals.

    [USD, CAD]
    USD-CAD has settled after touching two-year highs of 1.0654 on Monday, but the pair has remained well bid. The October 2011 high of 1.0657 has posed a strong resistance, though heavy stops are seen above the level. The August 2010 peak at 1.6075 will offer another resistance level. The CAD has been on a much softer footing following soft inflation data, which should keep the BoC in full dovish mode when they announce policy on Wednesday.

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