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By XE Market Analysis December 17, 2014 6:45 am
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    XE Market Analysis: North America - Dec 17, 2014

    The dollar traded firmer today, with AUD-USD making new four-year lows under 0.8150 and EUR-USD ebbing back to the 1.2450 area, putting over 100 pips between spot and yesterday's peak at 1.2569. USD-JPY made a peak of 117.50 before settling around 117.20-30. Russia's rouble held above yesterday's lows, aided by the Finance Ministry confirming that it had started selling foreign currency reserves, though trade continued to be volatile. Front-month NYMEX oil was showing a 1.8% decline as of noon in Europe, nearing $55.00 though remaining above yesterday's $53.69 low. Sterling was little affected by labour data and BoE minutes, which confirmed unchanged unemployment at 6.0% and a 7-2 MPC vote split for unchanged policy. Market focus is now squaring on the FOMC announcement and press conference. We think the Fed will drop the "considerable time" phrase, though recent oil price declines may strengthen the more dovish voices on the Committee, as was revealed to be the case by today's release of the December BoE's MPC minutes.

    [EUR, USD]
    EUR-USD traded softer, remaining under 1.2500 after rising above this level for the first time in nearly three weeks on Tuesday following above-forecast Eurozone PMI data. There has also been a dollar-negative narrative in markets that says the recent dive in oil prices will strengthen the voice of the doves at the Fed's FOMC (announcement later today), though we still expect the "considerable time" phrase to be dropped. We still remain EUR-USD bearish in the bigger picture on the view of diverging Eurozone and U.S. economic growth, and with the ECB inching closer to implementing QE. We look for an eventual move on the July 2012 low at 1.2042 and see recent gains as opportunity to establish a short position. Resistance is marked at 1.2532 (50-day moving average, a breach of which yesterday failed to sustain) and 1.2569-75.

    [USD, JPY]
    USD-JPY has traded relatively steadily, settling in the mid-to-low 117s today after yesterday's sharp decline to a 115.57 low and recovery to 117.76. Concerns that Russia might be headed for a default, similar to 1998 (the Russian central bank estimates that the economy will contract 4.6% in 2015 if oil prices stay at $60), should keep a USD-JPY a sell on rallies. The yen traded sharply higher during the 1997-1998 financial crisis period. This backdrop puts our previously yen bearish view on hold as the currency has a historically strong inverse correlation with risk aversion in global financial markets. The drivers of this are twofold, one being that yen-funded carry trades tend to be squared out during risk-off periods, and the other being that some of the huge Japanese saving surplus that is invested abroad (in search of yield) tends to be repatriated during such phases.

    [GBP, USD]
    Sterling was little affected by labour data and BoE minutes. The pound initially dipped as the UK unemployment rate missed expectations for a decline to 5.9%, instead remaining at 6.0%, though better than expected claimant count and average earnings offset. The December BoE minutes confirmed the 7-2 vote for unchanged policy, as was widely anticipated, though the dovish majority appeared more united than in November due as oil price declines are expected to seen CPI decline further over the near term. Cable dipped to a 1.5696 low in the initial wake of the data but quickly recovered to near net unchanged levels around 1.5715-20. We continue to class Cable as being in a bear trend, which has been persisting since the July cycle high at 1.7192. Resistance is now marked at 1.5786-1.5800, with key resistance at 1.5825-26. The 1.5541 trend low marks support ahead of 1.5500, while the August 2013 low at 1.5102 should be in the crosshairs of bears.

    [USD, CHF]
    EUR-CHF has been bumping along around the 1.2010 level, the upper level of the rumoured SNB buffer zone between here and the 1.2000 franc cap. SNB boss Jordan said last week that upward pressure on the franc has "intensified," and the central bank said it will enforce the cap with "utmost determination" and is prepared to take further steps if necessary. 'Further steps' would likely centre on negative interest rates, which SNB member Zurbruegg recently argued would be an effective tool as permanent excess liquidity in the Swiss financial system exceeds 300 billion francs. A Bloomberg survey last week found that more than 60% of respondents believe that the SNB will have to use negative interest rates to maintain the cap in the scenario that the ECB commences quantitative easing.

    [USD, CAD]
    USD-CAD logged new major-trend highs above 1.1600 this week. We anticipate more of the same as the CAN-bearish narrative based on weakening oil price trend is likely to sustain for a period yet. Support is marked at 1.1591-1.1600.

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