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By XE Market Analysis March 28, 2014 7:11 am
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    XE Market Analysis: North America - Mar 28, 2014

    More of the same today, with the AUD leading fresh gains in the dollar bloc currencies and the euro sinking to fresh lows. EUR-USD dove to 1.3705, breaching the Mar-5 low on route and putting the euro at its lowest level since late February. An unexpected drop to a negative y/y reading Spanish inflation was the spark, followed by a deceleration in regional German inflation figures. The follows the flurry of dovish ECB-speak earlier in the week. A rise in Eurozone economic confidence was overlooked. AUD-USD logged a fresh four-month high during Sydney trade, of 0.9295, subsequently correcting to the 0.9260 area. NZD-USD made its highest level since July 2011, of 0.8696. USD-CAD saw a three-week low of 1.1006. The gains in these currencies essentially reflect a sea change shift in global growth sentiment, with market reversing out of what now seemed an overly pessimistic view of China prospects and the scope for Beijing to respond with stimulus.

    [EUR, USD]
    EUR-USD dove to 1.3705, breaching the Mar-5 low on route and putting the euro at its lowest level since late February. An unexpected drop to a negative y/y reading Spanish inflation was the spark to the earlier drop. The follows a flurry of dovish ECB-speak earlier in the week, some of which implied that the euro is too richly valued. Yield differentials have been moving out of the euro's favour, with the 2-year T-note over 2-year Bund yield having risen to 32 bp. The market now "feels" bearish, reacting promptly to any negative leads. We have been advocating a bearish view of EUR-USD as the ECB is likely to remain in dovish mode for sometime yet, while we anticipate the U.S. economy to strengthen in Q2 and the Fed is already signalling rate hikes in 2015. We target 1.3500.

    [USD, JPY]
    USD-JPY has continued to make time in the low 102s. Japan's heavy data slate today was largely upbeat, as CPI accelerated, unemployment fell and retail sales improved. This helped support Japanese and Asian equity markets, but cast little impact on the yen. USD-JPY looks stuck within a 100.00-105.00 band. The BoJ's aggressive reflation 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). Key support is at 101.00 and 101.36, the latter of which marks the position of the 200-day moving average.

    [GBP, USD]
    There has been a sea change in sentiment for sterling over the last week. Incoming data have shown that economic recovery remains robust and we have had some relatively hawkish BoE-speak. The central bank's FPC (unit responsible for financial stability) said that it is "vigilant to emerging vulnerabilities," highlighting property market risks. Overall, the evident durability of the U.K. recovery, aided by a pick-up in conditions on the continent and recovering health in the banking sector, has underpinned sterling despite some recent protestations from some policymakers about the high level of sterling. We anticipate EUR-GBP will re-test the 0.8200 level and the Feb-16 low of 0.8157 over the coming weeks. We would also suggest sterling bulls consider GBP-JPY.

    [USD, CHF]
    EUR-CHF has drifted lower after making a one-month peak of 1.2234 on Wednesday. The up move had reflected further unwinding of the Swiss franc's safe-haven premium. The cycle low of 1.2104 was left unchallenged during the recent risk-off phase. We see potential for a recovery to the 1.2300-1.2400 area, but this assumes there are no renewed flare-ups in geopolitical tensions. The 1.2200 is now marked as a support level. SNB's Jordan earlier in the month 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 has broken below some key support levels over the last week, on route to a three-week low within a whisker of 1.1000. The strength in the Canadian dollar tallies with notably gains that have been seen in the AUD and NZD currencies. This in turn reflects a shift to a less pessimistic global outlook (to which the dollar-bloc currencies are sensitive to) than we saw recently with regard to the China slowdown theme (now offset by expectations of stimulus), and the threat from the geopolitical situation between Russia and the West. USD-CAD's mid-March surge to new cycle high of 1.1278 now looks to have been false breakout. We don't advise getting too carried away with a bearish USD-CAD view as the Fed vs BoC stance remains supportive. Key supports are pegged at 1.0955 (the Mar-6 low) and 1.0910 (the Feb-19 low).

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