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By XE Market Analysis December 12, 2013 7:36 am
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    XE Market Analysis: North America - Dec 12, 2013

    Reports that the U.S. bipartisan budget deal is set to pass the key House vote later today saw equity markets fall and imparted a degree of risk-off positioning in FX markets as the perceived odds of the Fed opting for a tapering announcement at next week's FOMC meeting firmed up a notch. This saw the safe haven CHF outperform following a late London AM move, despite a dovish SNB statement following its quarterly policy review. EUR-CHF hit a seven-month low of 1.2200. EUR-USD ebbed back after making another short-lived foray above 1.38 in the early London session. The high left was 1.3803, shy of the yesterday's trend peak of 1.3810. Dovish remarks from ECB boss Draghi and sub-expectations German production data help put a cap on the euro. USD-JPY and yen crosses rose to fresh recovery highs in early London traded, helped by a big bid in GBP-JPY, though prevailing equity market losses deterred yen selling as the currency normally correlatives with risk appetite.

    [EUR, USD]
    EUR-USD settled back at familiar sub-1.3800 levels around 1.3770-75 after the short-lived foray above 1.38 in the early London session. The high left was 1.3803, shy of the yesterday's trend peak of 1.3810. The double failure above 1.3800 and the lower high paints a technical picture of waning upside momentum, which the chart-minded will be alert to as prevailing levels are looking quite stretched above the 50- and 200-day moving averages relative to historical norms. ECB President Draghi's appearance before the EU Parliament saw him sound some dovish remarks, attesting that recovery in the Eurozone remains weak, inflation expectation expectations are firmly anchored, and that the central bank stands ready to act against low inflation. Meanwhile, the USD may encounter a stronger bid as Republican-controlled House of Reps is likely to ratify the budget deal later on Thursday, which will firm up the odds for the Fed announce QE tapering at next week's FOMC. Yesterday's six-week peak at 1.3810 is now marked as resistance, and above here we have the 2013 high of 1.3833, forming a key resistance zone in effect, which we think may sap the momentum out of the still-bullish market. Initial support is seen at 1.3750 ahead of 1.3735, the latter of which was formally a strong resistance level.

    [USD, JPY]
    USD-JPY and yen crosses rose to fresh recovery highs in early London traded, helped by a big bid in GBP-JPY, though prevailing equity market losses deterred yen selling as the currency normally correlatives with risk appetite. The Fed's course to tapering and the ECB's refrain from announcing further non-conventional stimulus last week is a contrast to the BoJ's committed anti-deflation fighting stance. USD-JPY's initial resistance at 103.00. Support at 102.40 and 102.15, the latter being yesterday's low and part of a support zone that we had been earmarking as a good level to buy. The main risk to those anticipating more fundamentally-driven yen weakness would be the advent of sustained risk aversion in global markets, which would likely support the yen, as there would be a net squaring out by speculative accounts using it as a funding currency.

    [GBP, USD]
    GBP-JPY jumped notably in early London session, and sterling concomitantly rose quite sharply against the dollar and euro too. GBP-has surged nearly 100 pips in making 168.93, which retraces just over half of the losses seen over Tuesday and Wednesday. There didn't appear to be any fresh news that might have sparked this move. From a fundamental and yield differential perspective, the GBP-JPY move makes sense, especially with Japanese policymakers pursuing a soft currency policy. We have a long-standing Cable target of 1.6500. Cable lifted back above 1.6400 having rebounded from above the 1.6320-25 support area, ahead of the Dec-6 low of 1.6293. We expect further advances in sterling, in time, befitting the U.K. economy's status as one of the fastest growing in the OECD developed nation grouping. It will be difficult for U.K. policymakers to compete against the soft currency policies of the likes Japanese policymakers. Yield differentials should be supportive, with the benchmark 10-year Gilt yield's approach of 3% starting to look almost attractive in a low yielding world, helping return sterling to the 'asset' side of the spectrum, despite the near zero interest rate policy of the BoE.

    [USD, CHF]
    The CHF recovered today. EUR-CHF dipped to a seven-month low of 1.2200. Prospects of Fed tapering, uncertainty about from ECB member Praet, whoc said Eurozone banks may reduce purchases of sovereign debt to lower their risk profile, rattled stock markets and encourage a safe haven flow to the Swiss currency. We expect the Swissie to remain well supported into next week's FOMC meeting in the U.S. as a significant portion of market participants are anticipating the Fed to commence QE tapering, which in the event may trigger a more sustained period of risk aversion in global financial markets. EUR-CHF support zone is marked at 1.2200-1.2205. The breach of the Jun-24 low of 1.2218 on Wednesday was a bearish development. Initial target is the Apr-21 low of 1.2179. Resistance shows up at 1.2250 ahead of the 20-day moving average at 1.2274..

    [USD, CAD]
    USD-CAD has settled to lower path, correcting some of the strong gains seen following the recent strong rally that left a new major-trend high of 1.0707 last Wednesday following the BoC announcement and statement, which emphasized the downside risks to inflation. The pair looked to have become a overstretched, and the mid-week breach of former consolidation support at 1.0625-30, and the 1.0600-05 zone, which encompassed former daily high points that were seen in late November, have been a strong near-term bearish signal. Initial retracement target is pegged at 1.0559, which both marks the Nov-30 low and the 50% retracement of the mid-Nov to early-Dec rally. Resistance is at 1.0590-1.0600. Should we see a successful House of Reps vote on the bipartisan budget deal, financial market risk appetite might drop, which would be a negative environment for the CAD.

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