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By XE Market Analysis December 13, 2013 7:07 am
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    XE Market Analysis: North America - Dec 13, 2013

    The USD has been encountering a stronger bid following the successful passage of the bipartisan budget deal in the House of Reps, firming up the odds for the Fed announce QE tapering at next week's FOMC. The has been reflected by yield differentials, with the yields of 2- and 10-year U.S. paper widening 2 to 3 bp versus the Bund benchmark equivalents. EUR-USD dove to a three-day low of 1.3709 before finding a toehold, and Cable extended to a two-week low of 1.6278 during the London AM session, while USD-JPY had earlier surged in Tokyo trade, taking out its May peak of 103.73 on route to setting a new long-term high of 103.92. The yen subsequently rebounded some during London hours, as selling in EUR-USD and Cable drew out stops in EUR-JPY and GBP.

    [EUR, USD]
    EUR-USD dropped to a three-day low in the low in the low 1.37s during the European AM session on Friday. We pointed out yesterday that EUR-USD's double failure above 1.3800 this week painted a technical picture of waning upside momentum, especially with prevailing levels are looking quite stretched above the 50- and 200-day moving averages relative to historical norms. Support comes in at 1.3694-1.3700, the former of which marks the week's low. From the fundamental perspective, ECB President Draghi made dovish remarks before the EU Parliament yesterday, helping offset the central bank's refrain from detailing further non-standard easing measures at the policy meeting earlier in the month, and many analysts are expecting the central bank to commence a QE program next year. Meanwhile, the USD seems to be encountering a stronger bid following the successful passage of the bipartisan budget deal in the House of Reps, firming up the odds for the Fed announce QE tapering at next week's FOMC.

    [USD, JPY]
    The JPY dove to fresh major-trend lows, with USD-JPY leading the charge as yield differentials and the associated contrasting stances of the Fed and BoJ underpin. USD-JPY took out its May peak of 103.73, setting a new long-term high of 103.92, so far. News that U.S. budget deal sailed through the House vote with ease boosted this trade, firming up the odds of the Fed opting for a tapering announcement at next week's FOMC meeting (though we still don't think these odds are more than 50-50). Coincidently, a Quick Corp survey of analysts found that 71% are expecting another BoJ easing by the end of calendar Q2 next year, which would offset a planned sales tax hike next April. After peaking at 103.92 there is, needless to say, talk of selling interest into and above 104.00, and the market is presently settled around 103.75. EUR-JPY and other yen crosses also made new highs. The Nikkei stock index celebrated the yen's weakness, which offset any concerns about Fed tapering. We presently target USD-JPY to 105.00. The main risk to those anticipating more fundamentally-driven yen weakness would be the advent of sustained risk aversion in global markets, a backdrop to which the yen would normally correlative with..

    [GBP, USD]
    The pound has corrected quite sharply this week after trading at two-year peak against the dollar and five-year highs against the yen. Cable extended to a two-week low of 1.6278 as of the time of writing, late AM in London. Stops were trigger through the initial support area at 1.6320-25 and then though 1.6300 and the Dec-6 low of 1.6293. These support points marked a key support zone, and the technical picture now looks geared for an extension to 1.6175. The action spilt over to GBP-JPY, which has recently been very well bid, and saw the cross turn lower as weaker speculative long positions were stampeded out. The move in Cable reflected a broader USD move, with the U.S. currency encountering a stronger bid following the successful passage of the bipartisan budget deal in the House of Reps as it has firmed up the odds for the Fed announce QE tapering at next week's FOMC. Fundamentally, the bigger picture the view remains unchanged, however, with the U.K. economy remaining one of the fastest growing in the OECD developed nation grouping.

    [USD, CHF]
    We expect the safe haven Swiss currency to remain broadly underpinned 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 has the potential to trigger a more sustained period of risk aversion in global financial markets. USD-CHF resistance is marked at 0.8835 and 0.8900. EUR-CHF support is 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 whipsawed higher on Thursday as the market discounts greater odds of the Fed announcing a commencement in QE taping at next week's FOMC, which contrasts the more dovish stance of the BoC. This has supported the pair via yield differentials and the risk that such a move by the Fed could herald in a more sustained correction in stock and commodity markets, which would normally be a net negative backdrop for the Canadian currency. USD-CAD recovered to the mid-1.0600s after making a two-week low of 1.0561. This brings the major-trend high of 1.0707, logged last Wednesday following the BoC announcement and statement, back into scope. The BoC statement had emphasized downside risks to inflation. Support is marked at 1.0616, the prevailing position of the 20-day moving average, and 1.0600.

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