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By XE Market Analysis February 12, 2015 6:40 am
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    XE Market Analysis: North America - Feb 12, 2015

    The euro and commodity bloc currencies rallied moderately on news of the agreement on Ukraine, which also went down well in European stock and commodity markets. EUR-USD lifted from the low 1.13s before stalling above 1.1350 for the second time in a day. The euro had also spiked to the 1.1350 area late yesterday following a false headline that Greece had reached an agreement in principle with the Eurogroup, subsequently reversing lower as it became clear that this was not the case. Yield differentials remain firmly in the dollar's favour, which are now over 167 bp in the case of the 10-year T-bond versus Bund, up 5 bp over the last day and comparing to the 145 bp level that had been prior to the stellar U.S. payrolls report. EUR-CHF recovered to the 1.0550 area from sub-1.05 levels. Elsewhere, USD-JPY rebounded to the upper 119s after a dropping sharply to a low of 118.73 (prior to this the pair had seen a six-week high of 120.47 in early Asian trade). The dive was sparked by unnamed sources with links to the BoJ cited by Bloomberg saying that extra stimulus would be counterproductive. There is market conjecture that the sources may be referencing BoJ dissenting members, whose views are already known, which helped USD-JPY rebound. AUD-USD lifted to the 0.7680-90, recovering after posting a one-week low in Sydney trade at 0.7644 on a sharp spike in Australian unemployment to 6.4% from 6.1%.

    [EUR, USD]
    EUR-USD was lifted by news of the agreement on Ukrraine, though for the second time in a day gains stalled above 1.1350. The euro has also briefly spiked to the 1.1350 area late yesterday following a false headline that Greece had reached an agreement in principle at the Eurogroup meeting, and subsequently reversed back to low 1.13s as it became clear that this was not in fact the case. The group's Dijsselbloen said that a way forward had been agreed but that discussions would continue as a "little more time" is needed. Ultimately, both sides are eager for Greece to remain in the Eurozone, and some sort of deal is likely to emerge, but that is unlikely to happen this week and the uncertainty should keep a lid on euro. Grexit concerns and geopolitics aside, yield differentials remain in the dollar's favour, which are now over 163 bp at the 10-year maturity level versus 145 bp that had been prior to the stellar U.S. payrolls report last Friday. We also expect the upcoming implementation of the ECB's QE program will grind EUR-USD to fresh lows, toward parity over time. The 11-year low at 1.1098, seen on Jan-26, offers an interim target. Resistance is at 1.1359-60 and 1.1384 (20-day moving average).

    [USD, JPY]
    USD-JPY rebounded from a sharp decline, recovering to the upper 119s after clocking a low of 118.73 (prior to this the pair had seen a six-week high of 120.47 in early Asia-Pacific trade). The dive was sparked by unnamed sources with links to the BoJ cited by Bloomberg saying that extra stimulus would be counterproductive as further declines in the yen would damage consumer confidence. There is conjecture in market talk that the sources may be referencing BoJ dissenting members, whose views are already known. Market participants will be looking for clarification in the days ahead, and we can expect choppy price action in the interim, though many speculative traders saw the drop as a buying opportunity.

    [GBP, USD]
    Sterling rallied after BoE Governor said that the next move would likely be a rate hike. He was speaking at the press conference presenting the latest Quarterly Inflation Report. He said that "we expect strongest real income growth in over a decade, as a consequence of that our view is that the most likely more is a monetary tightening." Although the BoE won't be in any rush to hike rates as monetary conditions have tightened amid the recent dive in inflation, and Caney also acknowledged the firmer levels of the pound which will play a role in subduing inflation, the stance of the central bank stands in contrast to many other central banks, a backdrop that should render the pound a long currency of choice. We expect sterling to hold up better against the euro than the dollar, anticipating EUR-GBP will grind lower an test of 0.7000 in time. Resistance is at 0.7450-60.

    [USD, CHF]
    EUR-CHF recovered to the 1.0550 area from sub-1.05 levels on news of the agreement on Ukraine, which has been supportive of the euro. This extends the recovery the cross has seen since trading as a low at 1.0414 earlier in the week, which was seen during a bout general euro weakness. SNB's Jordan reaffirmed this week that the central bank is prepared to intervene in EUR-CHF if necessary, that, "We are observing the exchange rate situation as a whole ... If necessary we are active," but, " ... we do not speak about our transactions." He said that the franc remains "clearly overvalued" at around 1.0500, but said refrained to comment on what it considers the preferred franc levels or what it sees as a fair value. An "informed source" of the Tages Anzeiger newspaper last week said that the SNB is initiating a "soft floor" in EUR-CHF at 1.05-1.10. SNB's vice-chairman Danthine in late January that the SNB was still "fundamentally prepared to intervene in the foreign exchange market," and that Singapore's SGD basket policy "deserved closer examination." The SNB was widely reported to have intervened last Thursday from levels near 1.0500.

    [USD, CAD]
    USD-CAD spilled under yesterday's low at 1.2572 on route to the low-so-far at 1.2546. The decline occurred concomitantly with a rise in front-month NYMEX crude futures back above $50 on news of the agreement on Ukraine, which has been supportive of the CAD and other commodity bloc currencies. Yield differentials still remain in the U.S. dollar's favour, however, and this should curtail USD-CAD's downside (unless we witnessing the beginning of a sea change in oil prices, which looks premature as yet). Technical support levels are at 1.2500 and 1.2435 (20-day moving average). USD-CAD's August 2009 high at 1.3063 provides a big-picture target.

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