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By XE Market Analysis March 21, 2014 8:03 am
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    XE Market Analysis: North America - Mar 21, 2014

    The USD traded mostly softer versus yesterday's New York closing levels, correcting some of the strong gains made in the wake of the FOMC this week. Trade was quiet due to a lack of market-moving themes and with Japanese markets having been closed today for the Vernal Equinox holiday. USD-JPY dipped to a 102.10 low before recovering to the 102.30, a level around which the pair and side-lined during Asian trade. EUR-USD briefly recovered the 1.3800 handle after lifting from 1.3765. AUD-USD managed to eke out a two-day peak of 0.9091. The PBoC set the USD-CNY reference rate at 6.1475, below Thursday's fixing of 6.1460, though the pair hit 6.2370, which was the weakest the yuan has traded at since Feb-25 last year. Cable breached Thursday's low and logged a fresh five-week nadir of 1.6575. There was market talk of a GBP 1 bln vanilla option with a strike of 1.6446 that is expiring at today's New York cut.

    [EUR, USD]
    EUR-USD briefly recovered the 1.3800 handle after lifting from 1.3765. The two-week low of 1.3749, seen following Yellen's signal that the Fed is on course to hike rates by mid-2015, now marks support. Our previous target of 1.3800 was met, but we continue to see a lower path for EUR-USD as the ECB is likely to remain in dovish mode for sometime yet given the deflation threat and concerns about euro strength (as pointed to by Draghi last week). Near-term resistance is marked at 1.3800, ahead of 1.3845.

    [USD, JPY]
    USD-JPY dipped to a 102.10 low before recovering to the 102.30, a level around which the pair and side-lined during Asian trade. Trade has been quietened by the absence of Japan, which was out for the Vernal Equinox holiday. USD-JPY left a peak of 102.68 in the wake of the post-FOMC dollar rally. In the bigger picture, USD-JPY looks stuck within a 100.00-105.00 band. BoJ policy would favour continued yen weakness, but the threat of China slowdown is an offsetting yen-supportive force, via the possible association of negative consequences on global stock markets (given the yen's normal inverse correlation with risk appetite). Support is at 101.00-101.27, the latter of which marks the position of the 200-day moving average.

    [GBP, USD]
    Cable breached Thursday's low and logged a fresh five-week low of 1.6575. This was the culmination of a 35 pip drop. Pressure came via GBP-JPY which dove sharply, around 100 pips to a 168.10 low, a move which brought Tuesday's five-week nadir of 167.77 back into scope. We've also picked on market commentaries talk of a GBP 1 bln vanilla option with a strike of 1.6446 that is expiring at today's New York cut, which could have some bearing on Cable today. We are presently targeting Cable to 1.6400, with our former long-standing 1.6500 having been met. We would see this as part of a bigger picture correction after the strong rally phase from July last year to February this year. Fundamentally we anticipate a moderation in the pace of U.K. recovery, while, as we have seen this week, the U.S. Fed is remaining on its tapering track.

    [USD, CHF]
    EUR-CHF failed to hold gains back above 1.2200 and has settled back to familiar levels in the mid-to-upper 1.21s. The SNB's decision to leave monetary policy unchanged and the Swiss franc limit peg against the euro in place had no market impact. The CHF has unwound a portion of its safe-haven premium following the placating tone of Russia's Putin earlier in the week, which saw geopolitical tensions over Crimea recede. The cycle low of 1.2104 was left unchallenged during the recent risk-off phase. SNB's Jordan had said last week that the central bank would defend the 1.2000 limit if concerns about Ukraine drove the franc higher. We don't advise speculative accounts to hold long CHF exposures below 1.2100 given the threat of SNB intervention ahead of 1.2000. The SNB has signalled that it would only consider removing it if inflation was much higher (CPI dipped back to -0.2% y/y in February).

    [USD, CAD]
    USD-CAD surged this week, above the late January major trend peak at 1.1224 to make a new cycle high of 1.1278 so far. This reaffirms the bullish trend that was seen between October and January. Support comes in at 1.1200-1225, ahead of 1.1100-15. We target 1.1350. The unexpected show of hawkishness from the U.S. Fed, which contrasts with the dovish stance of the BoC, has seen yield differentials spike in favour of the U.S. dollar.

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