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By XE Market Analysis December 4, 2013 7:27 am
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    XE Market Analysis: North America - Dec 04, 2013

    North American market participants will discover that the USD is near to where they left it at clocking off time yesterday against both the EUR and JPY, though they will notice it is also trading at moderately higher levels against both GBP and AUD, both of which were affected by disappointing data. EUR-USD made time in the upper 1.3570 to low 1.36s region, with the proximity of tomorrow's ECB meeting and Friday's U.S. jobs report curtailing trade. GBP-USD sank to a new low for the week at 1.6323 following a weaker than expected Markit services PMI outcome for November, of 60.0, though follow-through was limited as the overall U.K. economic picture remains bullish for the currency. The 60.0 level still indicates robust expansion and, given the much stronger than expected construction and manufacturing PMIs we saw earlier in the week, the U.K. composite PMI in still portends Q4 GDP growth of just over 1% q/q after Q3's 0.8% q/q pace. AUD-USD dove to a three-month low of 0.9008 after Australian GDP came in at +0.6% q/q, down from Q2's 0.7% and wrong-footing markets as it came just a day after many economist had notched up their forecasts to +0.8% q/q following unexpected strength in net exports data.

    [EUR, USD]
    EUR-USD has been making time in the 1.3570 to low-1.36s region. Market participants are waiting on approaching risk events, notably Thursday's ECB meeting and Friday's U.S. jobs report, the former of which carries dovish risk while the latter will have a determining influence with regard to the possibility of the Fed commencing a tapering program as soon as this month. Recent failed attempts to hold above 1.3600, the latest of which was yesterday, along with reports of good hedge fund selling interest above this level, suggest risk is to the downside. We think that the ECB is likely to announce further non-conventional easing measures while the U.S. jobs report on Friday should come in on the firm side (the employment component of the ISM report was solid), which may strengthen Fed tapering prospects. We target EUR-USD to 1.3500 initially.

    [USD, JPY]
    The JPY consolidated to moderately softer levels after yesterday's short-covering driven rebound. USD-JPY saw a narrow range centred around 102.60, with good demand noted from Japanese importers at the Tokyo fixing today, who made the most of a 1% advance in the yen since yesterday. Sell stop orders are reportedly clustered around 101.90, but look out of play for now, with the pair firming back above 102.50. On the options front, large 102.00 and 103.00 expirations are reported today in USD-JPY. BoJ board member Sato stuck to his dissenting guns today in suggesting that there is no need for a further easing before or after next April's scheduled sales tax hike. This runs counter to the prevailing view that the BoJ is standing reading to launch fresh stimulus if CPI and growth outlooks softened, a signal that the majority of board members will want markets to have as we head toward the planned sales tax rise, regardless of what Sato says. JPY traders should note that in the event of a strong U.S. jobs report this Friday, that this would be negative for USD-JPY as this would strengthen the prospect of Fed tapering and likely bring the consequence of a risk-off theme in global markets, a circumstance that the USD-JPY would normally correlate negatively with.

    [GBP, USD]
    Sterling dipped on the services PMI miss, but found a toehold against both the USD and GBP fairly quickly as the overall U.K. picture remains bullish for the currency. Cable logged a new low for the week at 1.6323 and EUR-GBP a high for the week at 0.8321. Cable's low was just above a trend support line formed by a series of daily lows draw from the Nov-12 nadir. Overall, still what can be technically called a bull trend. Sterling had been a star performer this week, buoyed by the strong U.K. construction PMI yesterday, which unexpectedly surged to a 10-year high of 62.6, backing up Monday's equally impressive manufacturing PMI, and Chancellor Osborne's presentation of the government's mid-fiscal year update on Thursday can be expected to be upbeat in tone. We have been targeting Cable to 1.6500, though would advise a EUR-GBP short a more attractive route for sterling bullish positioning as we think Thursday's ECB meeting carries dovish risk. The BoE's monetary policy announcement tomorrow, in contrast, should prove a non-event, with no changes widely expected and with the MPC typically refraining from releasing a statement following no-change decisions.

    [USD, CHF]
    We anticipate the CHF to remain on a firming course against the USD and EUR through to the week's end. The rekindled U.S. Fed tapering view as proven supportive for the safe haven Swiss currency, as this backdrop has elicited some risk aversion in global markets. We also anticipate a firm U.S. jobs report on Friday, which in the event should strengthen the possibility of the Fed commencing a tapering program and which would stir a higher degree of risk aversion in markets. USD-CHF is technically looking bearish too, holding within a three-week bear channel, targeting 0.8990. EUR-CHF has sunk to its range lows of 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, though this is not likely to have a great bearing on the CHF.

    [USD, CAD]
    USD-CAD logged a fresh two-yea highs to 1.0672 on Monday, and the pair has remained well bid. The August 2010 peak at 1.6075 is offering resistance presently. The CAD has been on a much softer footing following soft inflation data, which should keep the BoC in dovish mode when they announce policy later today. The BoC is expected to keep the policy rate at 1.00% (median 1.00%) and maintain the dovish language that points to currently accommodative rates being left in place for an extended period. A shift to an easing bias is possible given persistently weak inflation, but we doubt it will take that step just yet given the acceleration in Q3 GDP and core CPI that is on track to meet the BoC's 1.4% Q4 estimate. In the event, this could spark a short-covering rebound in the CAD.

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