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By XE Market Analysis January 2, 2015 6:07 am
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    XE Market Analysis: North America - Jan 02, 2015

    The dollar rallied to fresh trend highs against the euro and sterling, among other currency, aided by misses in manufacturing PMI data out of the Eurozone and UK. EUR-USD breached the July 2012 low at 1.2042, making a low of 1.2035. Cable lost over 100 pips in clocking its lowest level since August 2013, at 1.5445. USD-JPY, meanwhile, popped back above 120.00, making a peak of 120.50 so far, up from the Dec-30 low at 118.86. AUD-USD, buoyed by a long-awaited rebound in iron ore prices last week, also dipped on the broader strength of the greenback.

    [EUR, USD]
    Our long-standing EUR-USD target was met today, with the July 2012 low at 1.2042 falling in the wake of the Eurozone Dec manufacturing PMI release, which was revised down to 50.6 from 50.8. The low so far is 1.2035 and sub-1.20 levels now look likely before long. 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 widened over the last week to new cycle highs near 165 bp, up from levels around 147-48 bp seen before the Fed announcement on Dec-17. The market 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. Juxtaposed to this are expectations that the Fed will tighten policy around mid-year. EUR-USD resistance is marked at 1.2097-1.2100 and 1.2169-70, support at 1.2035 and 1.2000.

    [USD, JPY]
    USD-JPY popped back above 120.00 on broader dollar strength, making a peak of 120.50 so far, up from the Dec-30 low at 118.86. 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 by former range lows at 119.96-120.09, and resistance is marked by recent range highs at 1.2073-82.

    [GBP, USD]
    Sterling has taken a sharp dive on the PMI miss, with Cable losing over 100 pips in clocking its lowest level since August 2013, at 1.5445. The low from that month, at 1.5428, provides the immediate focus for the interbank market. EUR-GBP has rebounded toward 0.7800 after earlier making a new cycle amid general euro weakness, at 0.7745. U.K. Markit manufacturing PMI unexpectedly declined to 52.5 in December, the lowest level seen since September and down from 53.5 in November. Overall, 2014 was a good year but with a weakening finish as the sector came off the boil, sensitive to economic slowdown in the Eurozone. Construction and services PMI data, due next week, should hold up better.

    [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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