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By XE Market Analysis December 31, 2014 6:34 am
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    XE Market Analysis: North America - Dec 31, 2014

    The main currencies have largely flat-lined during trade in Asia and Europe. The various absentees included Japanese, German and Italian markets, while business elsewhere wound down ahead of the new year holiday. AUD-USD managed to extend yesterday's gain, edging out a new two-week high at 0.8215, piercing the 20-day moving average (at 0.8204) for the first time since mid-November. A firmer tone in iron ore prices in recent days as markets anticipate fresh Chinese stimulus efforts has helped underpinned the Aussie, as the metal is a major export of Australia. The need for China to stimulate was underscored by the final December reading of the HSBC/Markit manufacturing PMI, which was confirmed at a seven-month low of 49.6. Elsewhere, EUR-USD posted a 25-pip range, remaining near net unchanged in the mid-1.21s. USD-JPY saw a slight upside drift in Asia, clawing above 119.70 before ebbing back under 119.50 in Europe. There was no data of note out of Europe, while ECB chief economist Preat argued that recent monetary policy stimulus may not be sufficient, which helped underpin stocks as it supports the view that the central bank will announce a QE program at its Jan-22 meeting.

    [EUR, USD]
    We remain EUR-USD bearish, and look for a move on the July 2012 low at 1.2042. There has been a fresh shift in the dollar's yield advantage this week with 10-year U.S. T-note yield differential over the equivalent bund has widening to new cycle highs near 165 bp, up from levels around 147-48 bp seen before the Fed announcement on Dec-17. The market, meanwhile, is speculating that the ECB will announce QE at its Jan-22 policy meeting, with concerns about disinflation outweighing the recent improvement in survey data. EUR-USD resistance is marked at 1.2200-21 and 1.2272-75, support at 1.2124-25 and 1.2100.

    [USD, JPY]
    USD-JPY saw a slight upside drift in clawing above 119.70, though activity has been muted with Tokyo markets now closed until Jan-5. We remain bullish with 'Abenomics' policies likely to maintain the dollar's yield advantage over the yen, even if Fed tightening prospects remain tentative.USD-JPY support is marked at 119.00 and 118.80-82, with former range lows at 119.96-120.09 now marking resistance.

    [GBP, USD]
    Cable remains in the grip of a bear trend, which has been persisting since the July cycle high at 1.7192. Resistance is now marked at 1.5634 (20-day moving average) and 1.5700, support at 1.5500 and 1.5486. The August 2013 low at 1.5102 should be in the crosshairs of bears. The drop in UK inflation to a six-year low of 1.0% has strengthened the dovish voices at the BoE's MPC.

    [USD, CHF]
    EUR-CHF has established a range below 1.2050 after spiking to a 1.2096 peak Dec-18 after the SNB implemented a negative interest rate of -0.25%. SNB member Zurbruegg recently argued that a negative interest rate would be an effective tool as permanent excess liquidity in the Swiss financial system exceeds 300 billion francs. SNB boss Jordan had said recently 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.

    [USD, CAD]
    USD-CAD has settled to a consolidation around 1.1600 amid a backdrop of steadier oil prices. We anticipate that the CAD-bearish narrative, based on weakening oil price trend, is likely to sustain for a time yet. Support is marked at 1.1550-65.

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